Most people have heard the trope that financial markets are like a rollercoaster. But in March, the stock market took investors on the ride of their lives.
As countries around the world quickly shut down large swathes of their economies to contain the spread of COVID-19, Canada’s benchmark stock index shed around 35 per cent of its value.
It was a gut-wrenching moment — one that has prompted many to rethink their investment strategy.
According to a recent poll conducted by Ipsos for Global News, some 14 per cent of Canadians are changing their approach to investing amid the novel coronavirus pandemic.
Why trying to beat the stock market doesn’t work
But is that a good idea?
The answer, generally, is no, said Robb Engen, a fee-only financial planner based in Lethbridge, Alta. and author of the popular personal finance blog Boomer and Echo.
If you are investing for a long-term savings goal, have put your money in a wide variety of investments and can stomach the ups and downs of your portfolio, then riding out a market crash like the one we just saw is the name of the game, Engen said.
Whenever stocks take a dive like the one markets experienced in the first three weeks of March 2020, there is always the impulse to cut one’s losses and cash out, said David Dyck, chartered investment manager at WealthBar, a Vancouver-based robo advisor.
The problem with that, though, is that it’s very difficult to know when to get back into the market — and according to Dyck, history shows missing out on some of the days when stocks are rallying generally costs investors more, in the long run, than whatever they saved by avoiding part of the stock plunge.
An investor who missed just five of the best days of the S&P 500 stock market index between 1980 and 2018 would have ended up with 35 per cent lower returns, according to research by Fidelity Investments.
And the trouble is, “you just don’t know when the good days are going to happen,” Dyck said. In fact, he added, the good days are “often surrounded by the bad ones.”
So far, this has held true for the current market gyrations. Canada’s main stock index closed its best week in over a decade just before the Easter long weekend.
Another study by IG Investors Group compares the fate of a hypothetical investor who put $100,000 in stocks mirroring the S&P 500 at the start of 2006.
If the investor had stayed in the market throughout the 2008-2009 financial crisis, they would have ended up nearly doubling their money in the span of a decade. By contrast, if the same investor has sold everything at the bottom of the market in 2008 and jumped back in one year later when the recovery was well on its way, they would have grown their portfolio to just $114,000 over the same 10 years.
“By staying invested — yes, you’re capturing all that outside, but you’re also getting every single good day on the markets. And that’s why staying invested is the wisest thing to do,” Dyck said.
But what if the latest market conditions had you losing your sleep? And what if you lost money you actually need right now?
Sometimes changing investment strategy after a market plunge can make sense, Engen said. And sometimes, what you may want to tweak has nothing to do with your investment allocation, Engen and other financial experts told Global News.
Investing with robo-advisers during recessions
Reasons for changing your investment strategy:
1. You overestimated your risk tolerance
Often, advice about staying the course through financial meltdowns is based on the assumption that you accurately estimated your risk tolerance, Engen said. But it’s hard to really know just how you’re going to feel checking your monthly investment statement and seeing double-digit losses until it actually happens, he added.
Especially during the last 10 years, which saw the longest bull market in history, it’s been easy for investors to overestimate their risk tolerance, Engen said.
While stocks hold the promise of higher returns over the long term, they’re also prone to steep ups and downs. By contrast, other lower-risk investments, like bonds, deliver lower returns but are also much less volatile.
“Perhaps you’re not a 100-per cent equity investor,” Engen said. And that’s OK.
An investment portfolio that’s a mix of stocks and bonds may be a better fit, Engen said.
A much more reasonable approach for many investors is a balanced portfolio of 60 per cent stocks and 40 per cent bonds, he added. For example, Vanguard’s Balanced ETF Portfolio (VBAL) was down just 18 per cent at its lowest point in the recent crash, compared to a 34 per cent plunge for Vanguard’s All-Equity ETF Portfolio (VEQT), he noted.
Still, it’s usually best to avoid changing your investment strategy right in the middle of market turmoil, said Markus Muhs, investment advisor and portfolio manager at Canaccord Genuity in Edmonton.
“During a hurricane, it’s really hard to make those decisions to try to change your direction,” he said.
“Then you’re just trying to batten down the hatches and try to make it through this.”
But when stock prices have recovered somewhat and the waters aren’t quite so choppy, you may want to use your newly acquired self-awareness of your actual risk tolerance to reset your investment compass, Muhs said.
“Maybe now’s the time to look at the markets,” he added, noting that stock prices have bounced back to levels that were all-time highs just two years ago.
What Does ‘Sustainable Investing’ Mean?
2. You took on too much risk with a short-term investment
Another good reason to rethink the way you invest: you lost money you’re going to need now or in the next short while.
“If you don’t have at least a five-year window of that money, it shouldn’t be in the market,” Engen said.
And you may want that time horizon to be longer than 10 years if you’re thinking of investing 100 per cent of the funds in stocks, said Muhs.
But Muhs is skeptical of investing in the market for something like a downpayment on a house even if you do have a time horizon of more than 10 years.
That’s because almost every young client Muhs has worked with has ended up purchasing a home sooner than planned because “some kind of opportunity came up,” he said.
It’s easy to imagine some first-time buyers seeing exactly that kind of unexpected opportunity right now, after the pandemic froze the spring housing market, Muhs said.
In general, “in terms of a home purchase, saving cash is king,” he said.
Engen suggests parking money for a downpayment in a savings account with a competitive interest rate, where it will at least keep pace with inflation.
Still, homebuyers can still benefit from stock market growth if they have some extra cash at hand, he added.
When Engen was saving up for his own home about 10 years ago, he did use some investments to boost his down payment. That, however, was merely a top-up, he said. If the stock market has been down when he needed the cash, he would have been perfectly fine without touching his investments, he added.
“I can’t imagine putting your entire downpayment into the market,” he said.
Money 123: Ensuring your savings last through your retirement
3. Your investments aren’t diversified enough
Diversification means putting your investment eggs in many different baskets to limit the risk tied to any single company, industry or country.
No matter your ability to tolerate the ups and downs of the market, it’s always good to have a broadly diversified portfolio, Dyck said.
“If you’re an aggressive investor, instead of holding five stocks, you hold a basket of funds that have dozens or hundreds of stocks at different businesses and regions,” he said.
If you’re a risk-averse investor, you hold a mix of fixed-income securities that can provide better returns than a savings account without the wild ups and downs of stocks, Dyck said.
Not enough diversification can result in your investments performing even worse than the overall market in a downturn.
“It’s about making sure you have sufficient diversification to manage risk at any level of risk,” Dyck said.
Dividend investors should also be thinking about whether or not they’re diversified enough, Muhs said, noting that the economic impact of the current pandemic carries risks for dividend-yielding companies in a number of industries, from airlines to utility companies.
U.S. aircraft maker Boeing, for example, recently told investors it could be years before investors see another dividend payout.
“Dividends are a nice side effect of investing,” Muhs said. “But it should never be the modus operandi of your investment style looking for dividends.”
4. You’re paying too much in investment fees
If you have an investment advisor who picks stocks, bonds or mutual funds for you, you may want to take a hard look at how your investments fared compared to the overall market, Engen said.
“What you hear a lot from those advisors is, ‘don’t worry, you can get all of the upside in the market, but I’ll protect your downside’,” Engen said.
Take a look at your latest statements, Engen said. If your advisor didn’t live up to expectations and you’re paying a steep fee for their services, consider whether you wouldn’t be better off managing your investments on your own with low-cost options that rely on index funds that just mirror the market’s ups and downs, he added.
Money 123: Canadians could be losing a lot to investment fees
5. You have money to invest
If you’re a new investor hoping to jump into the market, now’s a good time to do so, Muhs said. The same holds if you can afford to ramp up your contributions, he added.
Muhs sees the recent plunge in stock prices as a good opportunity for older millennials, most of whom likely didn’t have any money to invest in the last bear market a decade ago.
Now, many millennials are “finally at a stage in their career where they can save more or they’re just being paid a bit more.”
“Having a drop of the markets is … great for them.”
Go in knowing that investments are much cheaper than they were a few months ago, but not believing that they can’t go down again in the near term, Dyck said.
“Don’t worry about short-term declines because, long-term, your best bet is to have your money invested as soon as possible for as long as possible,” he said.
And that’s why, if you have lump sum of money to invest, it’s best to go all in, instead of dipping in gradually, Dyck added.
6. You’re retired and have money you can afford not to spend
Engen recommends retirees have at least five years worth of living expenses in cash. This, he said, ensures they’ll be able to ride out an even prolonged period of lower prices in the market without having to draw on their investments and crystallizing their losses.
Thinking you can recover your losses from a big market crash within three years is probably a safe bet, but “five years is just that extra built-in protection,” he said.
If you don’t have that plush cash cushion, though, and must tap your portfolio, it may be a good idea to at least scale back the amount of your withdrawals, if you can afford it, Engen said.
It helps, this year, that Ottawa recently passed legislation lowering the minimum amount for mandatory withdrawals from a Registered Retirement Income Fund (RRIF) in 2020 by 25 per cent.
Baby boomers may be the investors facing the greatest investment challenge in the current crisis, Muhs said.
On the one hand, in the 1980s, when boomers were starting families, buying homes and needed to borrow, interest rates were “sky high.” On the other hand, now that boomers have savings they need to turn into a reliable income stream for retirement, interest rates are at near zero, with few options but the volatile stock market to generate decent returns.
“It’s a real challenge,” he said.
The findings about Canadians changing their investment strategy are part of an Ipsos poll conducted between March 24 and April 2, 2020. The survey is based on a sample of 2,400 Canadians interviewed online. The poll is accurate to within ± 2.3 percentage points, of what the results would have been had all adults in each of the markets aged 18+ been polled. The credibility interval will be wider among subsets of the population. All sample surveys and polls may be subject to other sources of error, including, but not limited to coverage error, and measurement error.
© 2020 Global News, a division of Corus Entertainment Inc.
This Top TSX Gold Stock Is a Great Long-Term Investment – The Motley Fool Canada
There is no question this economic environment is ideal for gold prices and, therefore, TSX gold stocks. However, some gold stocks are so strong, investors can buy the stocks knowing they are great long-term investments.
Gold is something investors should always have at least a small portion of their portfolio exposed to. And in times of uncertainty, when a safe-haven asset is demanded, that’s when investors should be increasing their exposure to gold.
Today’s environment is precisely that. The uncertainty in both financial markets and economies makes a safe-haven asset like gold one of the most attractive assets to be increasing exposure to.
TSX gold stocks today
The economic environment around the world has been dire since the coronavirus pandemic hit. With no vaccine and little knowledge of the deadly disease, governments had to act quickly to protect their countries, enacting measures that have decimated economies.
Then, to deal with the economic consequences, massive fiscal and monetary stimulus has taken place around the world.
While this stimulus was needed and warranted, it doesn’t take away from the fact that central banks are printing money and governments are issuing new debt at unprecedented levels.
All of these conditions are creating the perfect storm for gold prices to rise. Some analysts even think that gold could skyrocket to $3,000.
Gold prices have been gaining momentum going back to December of 2018. In those 17 months since, prices have increased roughly 40%, an extremely rapid pace for gold.
And when you consider that the environment today is even more favourable than it was in 2018 and 2019, increasing exposure to gold investments is a no-brainer.
Top TSX gold stock to buy
Any time the price of gold is rising significantly, gold stocks will see a major positive effect. Since December 2018, the iShares S&P/TSX Global Gold Index ETF is up roughly 100% and more than double the pace of gold.
Barrick, a $60 billion company, is one of the world’s largest gold producers and an investor favourite in the gold industry.
The company is one of the best in the business, and, with its massive global diversification, it’s a stock you can hold for the long term.
In the first quarter, Barrick produced incredible results. The average realized gold price was $1,589 — a 22% increase from the same quarter in 2019.
That increase in gold price drove a 30% increase in revenue and a roughly 50% increase in operating and net income.
And when you consider that the average realized price in the quarter is nearly 10% below where gold is today, it’s clear this company is going to have a strong period of performance over the near term.
One of the reasons Barrick is so attractive today is the focus management has had on cutting costs and increasing shareholder value.
In the first quarter, the company produced nearly 1.25 million ounces and had all in sales costs of just $950 an ounce.
So, it’s no wonder why Barrick, the top TSX gold stock, is so profitable in the current environment and will continue to increase its profitability as gold prices rise.
Barrick’s solid operations and high-quality management team makes it one of the top gold stocks on the TSX.
It even pays a dividend that yields more than 1%. While this isn’t going to make or break your investment, it demonstrates management’s willingness to return capital to shareholders.
If you are underweight gold or need some resiliency in your portfolio, I would seriously consider adding a position in Barrick Gold today.
As we approach a new month, check out some of the other top stocks to buy besides Barrick.
Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.
Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.
A case study in how not to invest in bank stocks – The Globe and Mail
I have two investments I just don’t understand: BK and BK.PR.A. They were purchased by a financial adviser I have since parted ways with. I know they invest in bank stocks, but I can’t understand why BK in particular is doing so badly. I feel that these shares are a special type of investment that is more complicated than most.
More complicated than most? That’s an understatement. Your adviser shouldn’t have recommended a product you don’t understand. What’s more, as you’ll see, the adviser’s recommendation to buy BK and BK.PR.A together makes no sense from a financial standpoint – except for the fat commission he or she likely pocketed in the process.
BK and BK.PR.A are two different classes of shares issued by Canadian Banc Corp., an investment vehicle known as a “split share” corporation. Canadian Banc Corp. holds a portfolio of the six biggest Canadian bank stocks, and while BK and BK.PR.A both provide exposure to those underlying stocks, they do so in different ways and with dramatically different results.
BK.PR.A, the preferred shares, are relatively stable. They don’t participate in the ups and downs of the underlying banks, but they pay a fairly secure dividend that is funded by the dividends from those shares. The preferreds also get first claim on the capital of the underlying portfolio up to the preferred’s issue price of $10 a share.
Adding yet another layer of protection, although BK.PR.A’s dividend is variable because it is tied to the prime lending rate, BK.PR.A’s yield is never allowed to drop below 5 per cent, as calculated on the $10 issue price. (BK.PR.A has been trading slightly higher than $10 recently, so the yield based on the market price is currently a bit below 5 per cent.) Reflecting its conservative characteristics, BK.PR.A has produced steady returns over the years, and is a suitable choice for an income-seeking investor.
BK, the class A shares, are a different story. Essentially, the class A shares (also known as capital shares) are entitled to all of the value in Canadian Banc Corp.’s bank stock portfolio after the preferreds’ dividend and fixed capital requirements are satisfied. This means the class A shares are effectively a leveraged bet on the underlying stocks. If bank stocks rise, the class A shares will rise even more. If bank stocks fall, the class A shares will suffer an even bigger loss.
The sell-off triggered by the novel coronavirus pandemic is a great illustration. From Feb. 21 through May 28, BK shares plunged about 37 per cent. That’s far worse than the drop of about 22 per cent for the BMO Equal Weight Banks Index ETF (ZEB), a fund that holds the same six banks – but with no leverage, and lower costs.
BK also pays a dividend, but it’s anything but stable. The dividend is reset monthly to yield 10 per cent based on BK’s average market price over a designated three-day period, which means the dollar amount of the dividend will rise in good times, and fall in bad times.
When markets get really ugly, however, BK’s dividend can disappear altogether. Even though none of the underlying banks has cut its dividend, BK suspended its payout in March after the net asset value per unit of Canadian Banc Corp. fell below the threshold of $15 that triggers a cessation of dividends on the class A shares. BK has since reinstated its dividend, but the monthly amount is about 40 per cent lower than it was a year ago.
You may be wondering how BK can pay a 10-per-cent dividend when the preferred shares are already yielding 5 per cent. According to the prospectus, “to supplement the dividends received on the portfolio and to reduce risk, the company will from time to time write covered call options in respect of some or all of the common shares in the portfolio.”
But many split share corporations also resort to selling stocks in the underlying portfolio to generate cash required to pay dividends on their class A shares, said James Hymas, president of Hymas Investment Management. “It is my belief that, if people understood class A split shares, they wouldn’t buy them.”
With the rebound in bank stocks this week, BK has recovered some of its hefty losses. But its total return, including dividends, for the five years through May 27 was still negative 1.2 per cent on annualized basis, according to Bloomberg. Over the same period, ZEB posted a positive annualized total return of 4.6 per cent. Clearly, an investor who wanted exposure to bank stocks would have been better off buying a low-cost bank ETF instead of a leveraged product such as BK.
What’s more, your adviser should have known that, although BK and BK.PR.A have different characteristics on their own, they are complementary pieces of the same underlying portfolio. When you put them together you’re essentially buying a portfolio of bank stocks – just in two different wrappers that add unnecessary layers of complexity and fees. Canadian Banc Corp.’s management expense ratio of 1.35 per cent is more than double ZEB’s MER of 0.62 per cent.
“Your reader was given really stupid advice by the adviser, because when you own the class A shares and preferred shares in equal proportions, all you own is a fund with a lot of bells and whistles that owns bank stocks,” Mr. Hymas said. “You can do that a whole lot easier by buying an ETF that owns bank stocks. And it’s much cheaper.”
E-mail your questions to firstname.lastname@example.org. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
Special to The Globe and Mail
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The best investment every digital brand can make during the COVID-19 pandemic – TechCrunch
Intuitively, stores that sell online should be making a killing during the COVID-19 pandemic. After all, everyone is stuck at home — and understandably more willing to shop online instead of at a traditional retailer to avoid putting themselves and others at medical risk. But the truth is, most smaller online stores have seen better days.
The primary challenge is that smaller shops often don’t have the logistics networks that companies like Amazon do. Consequently, they’re seeing substantially delayed delivery timelines, especially if they ship internationally. Customers obviously aren’t thrilled about that reality. And in many cases, they’re requesting refunds at a staggering rate.
I saw this play out firsthand in April. At that point, my stores were down 20% or in some cases even 30% in revenue. Needless to say, my team was freaking out. But there’s one thing we did that helped us increase our revenue over 200% since the pandemic, decrease refund requests and even strengthen our existing customer relationships.
We implemented a 24-hour live chat in all of our stores. Here’s why it worked for us and why every digital brand should be doing it too.
Avoid the common ‘unreachability’ frustration
When I started my first online store in 2006, challenges that bogged my team down often meant that my team’s first priority became resolving those challenges so that we could serve our customers faster. But admittedly, when these challenges came up, it became more difficult to balance communicating with our customers and resolving the issues that prevented us from fulfilling their orders quickly.
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