News that stock markets are hitting new highs isn’t news at all. They’ve been hitting new highs for over a decade and before that they hit new highs. Over the long-term, they have always gone up.
All those highs can be problematic for long-term investors adhering to the ‘buy low, sell high’ principle, and sitting on the sidelines waiting for the next big market correction. Keeping a large chunk of savings in cash or fixed income is not an option for most Canadians who want to retire comfortably. Cash generates close to zero returns over time and two per cent is a stretch for safe, fixed-income investments like bonds.
Most retirement plans are based on an assumption that equity returns in the upper single digits will compound over time. That won’t happen for investors waiting for the lows to be low enough.
Being skittish about putting your retirement savings at risk is perfectly natural. Psychologists consider it a behavioural bias called loss aversion. Deep in the back of our minds, the pain of losing money is disproportionately stronger than the pleasure from gaining it, putting fear ahead of reason.
A recent study on loss aversion by Sun Life Financial attempted to quantify this bias in terms of dollars, by asking people how much they would need to gain in relation to the amount they would risk losing. The study found most respondents would not risk losing $100 if the potential gain was only $100. More agreed to take the risk as the potential gain increased. It found most investors would only risk the $100 if the potential gain was doubled.
Much of today’s loss-aversion sentiment could be rooted in the global market meltdown of 2008, which can also serve as a worst-case scenario since it was the worst financial collapse since the Great Depression of the 1930s. In both cases, losses were devastating, but markets eventually recovered and investors who overcame their fear and held steady recouped their losses.
Long-term charts of the benchmark S&P 500 and S&P/TSX composite index show steady gains in the decades before 2008. The S&P 500 lost half its value between October 2007 when the meltdown began and its March 2009 bottom. By October 2013, the S&P 500 topped its pre-meltdown high and has since doubled from there – as if the meltdown never even happened.
The plunge was much quicker and the recovery much slower for the TSX, which lost nearly half its value between June 2008 and February 2009. It wasn’t until June 2014 that the TSX topped its pre-meltdown high. It has since rallied an additional 20 per cent.
That’s not to say the next big correction won’t be tomorrow, but it’s a fact of life that most of us need to invest to retire comfortably and getting there usually requires taking a leap of faith in the equity markets. As the mandatory investment industry disclaimer says: “past returns are not an indication of future performance.” Investors cannot control the broader markets but there are hedging strategies that can help cushion the blows and outpace the highs, which are outlined below.
- Dollar cost averaging: Making regular contributions over time smooths out entry points in fluctuating markets. It allows investors to buy into stocks as they rise, and buy stocks that are down at a discount.
- Income-generating investments: Two per cent isn’t much of a return for fixed-income investments like bonds, but it does generate reliable returns in times of stock market volatility. Portfolios should have a fixed-income component that grows proportionally as the investor nears retirement and needs to withdraw cash. Stocks that pay reliable dividends are also a good source of income regardless of equity market conditions.
- Diversification: Spreading your equity investments among sectors and geographic regions can limit risk and open up your portfolio to opportunity. We often tend to look at stock markets as a whole but there are a lot of parts that move in different directions.
- Buying the best of the best: Most stocks get swept up in market advances and declines but the best ones tend to lose less on the downside and gain more on the upside. Finding the best stocks means doing your homework, getting professional investment advice – or both.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email email@example.com.
U.S. stock futures rise following Friday's omicron-sparked selloff – MarketWatch
U.S. stock futures rose late Sunday, following a steep selloff Friday sparked by fears of the global economic impact of a worrisome new strain of COVID-19.
On Friday, Wall Street suffered its worst day in more than a year amid growing concerns over the new omicron variant of COVID-19. The World Health Organization’s technical advisory group on Friday declared it a “variant of concern,” and a number of countries imposed flight bans from countries in southern Africa, where the variant was first discovered.
Little is known about omicron, but investors Friday braced for bad news.
In a holiday-shortened session, the Dow Jones Industrial Average
slumped 905.04 points, or 2.5%, to 34,899.34, with the index logging its worst daily drop since Oct. 28, 2020, according to FactSet data. The S&P 500
fell 106.84 points, or 2.3%, to 4,594.62, and the Nasdaq Composite Index
sank 353.57 points, or 2.2%, to 15,491.66.
“The pandemic and COVID variants remain one of the biggest risks to markets, and are likely to continue to inject volatility over the next year(s),” Keith Lerner, co-chief investment officer and chief market strategist at Truist Advisory Services, wrote in a Friday note. “It’s hard to say at this point how lasting or impactful this latest variant will be for markets.”
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Canadians should experience the fastest drop in gasoline prices in nearly 13 years on Sunday as fears about a virulent new COVID-19 variant are expected to provide a break of 11 cents per litre at the pumps.
Dan McTeague, president of Canadians for Affordable Energy, said the national average price could drop to about $1.32 per litre but begin to rise again midweek.
“(Sunday) represents the single largest decrease at the pumps we’ve seen going back to 2009,” he said in an interview.
Global crude oil prices plunged Friday over fears about a new COVID-19 variant called Omicron that prompted Canada to ban entry for foreign nationals who travelled through southern Africa.
The January crude oil contract fell 13.1 per cent or US$10.24 on Friday and currently stands at US$68.15 per barrel.
The decrease came as U.S. stock markets closed early Friday because of the Thanksgiving holiday.
“Sunday and Monday are going to be the best days for Canadians to fill up, including British Columbia,” McTeague said
Even residents of flood-ravaged B.C. will save on the province’s high gasoline prices despite facing rationing because severe flooding has shut both the Trans Mountain pipeline and the province’s lone refinery.
Drivers of non-essential vehicles can only purchase up to 30 litres per visit to a gas station in the Lower Mainland, Sunshine Coast, Sea to Sky area, Gulf Islands and Vancouver Island.
East Coast residents won’t reap the immediate benefits of Sunday’s price drop because its regulated regional system averages price movements. That provides price predictability but blunts price discounts.
Despite the upcoming decrease, national gasoline prices have surged nearly 43 per cent in the past year as the reopening of the global economy from pandemic lockdowns prompted a recovery in crude prices.
McTeague suggested Canadians shouldn’t get too comfortable with the energy savings. He said prices are expectd to increase as OPEC and its allies, who are meeting on Monday, will likely refuse to increase production any further. Energy traders realize that Friday’s decrease was overdone and “flies in the face of fundamentals,” he added.
“My sense is that the decreases that we saw were a little exaggerated and overbought, and for that reason I think we might see a little bit more balance come back to the markets and fundamentals by Wednesday,” McTeague said.
“Unless there’s further unsettling news of greater and further lockdowns, I would expect that oil prices are probably going to recover US$3 to US$4 a barrel by Monday or Tuesday, which means by Wednesday or Thursday we could be looking at increases in the order of four or five cents a litre.”
McTeague said some gasoline savings will continue for a couple of weeks, but he foresees crude climbing back to about US$90 a barrel, which would translate into prices in Canada exceeding $1.50 per litre.
Impending carbon tax increases will further boost prices.
A tax of 2.5 cents per litre, including HST, will take effect on April 1, 2022. It will be followed in December by the clear fuel standard that will add another 18.1 cents per litre including HST, said McTeague.
Adding to the inflation pressure is the Canadian dollar which is less valuable than when it was at par the last time crude prices were around US$80. That reduces the purchasing power for all kinds of products, including energy and food.
The Canadian Automobile Association said that as of early Saturday morning, Manitoba had the lowest average pump price of $1.35/L, followed closely by Alberta at $1.377, while Newfoundland and Labrador was the highest at $1.583 with British Columbia at $1.558.
This report by The Canadian Press was first published Nov. 27, 2021.
Ross Marowits, The Canadian Press
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