Before You Backup the Truck

Back up the Truck

Are you piling on too many equities?

IKEA makes great commercials! My favourite is where the middle-aged couple are running out the exit with their goods, while the lady is yelling to her husband “get the car, get the car!”  She’s gotten such a good deal at IKEA she is just beside herself with frenzy, because she can’t believe it’s true.

Investors also realize the stock market is a bargain, after two days of massive declines. They are also bargain hunting with frenzy. And that’s a good thing. Other investors may be frozen in fear, or even worse selling their equities. It’s the smart ones who swoop like vultures to buy discounted stocks on dips and corrections. So many investors are “backing up the truck” so to speak, to buy cheap stocks and equities on sale. If I had the capital I certainly would be as well. In fact, it’s the first time in my life I’ve seen a group of grown men, talk about shopping with such enthusiasm!

We’re Not Out of the Woods Yet

But should you buy everything now, after only two days of sudden declines? Or just invest half now and wait for more bargains? Is the market just blowing off some steam, or are we in for another big decline? Who knows, I really have no idea, but don’t be in a rush to spend all of your money just yet. There still may be more opportunity, and we may not be “out of the woods“.  With Standard Poor’s unprecedented downgrade of the U.S. credit rating to AA-plus, there is still uncharted territory in the days and weeks to follow.

What the Past Tells Us

S&P TSX Composite

Click for larger image

The past tells us that sudden market declines of only a few days are seldom followed by raging bull markets. That isn’t always true, and as we know markets turn very quickly, and are unpredictable (like last week). But what we do know is “the trend is your friend”.  In other words if there is a change in the trend, or the trend indicates a market direction, then it’s a decent indicator. In fact the TSX Composite Index has actually been in a down trend since May 2011, as indicated by the 50 Day moving average (see TSX chart to right). I also used this chart in my previous post Keep Calm and Steady.

Back on September 15th 2008, after the infamous collapse of Lehman Brothers, The TSX tumbled some 515 points, or -4.2%% to close at 12,254 points. (Do those support levels sound familiar?). While October 2008 presented another great buying opportunity, as the TSX tumbled another -26%, it didn’t stop there. Markets continued to collapse another -16% in only a few months, the TSX plummeting to 7,591 on March 2nd, 2009. Had you left some cash on the table, and weren’t too shell-shocked, like most of us were, you could have bought even more equities on sale in early 2009. But if you spent all your money, you would have had to sell a large chunk of your bonds, or borrow to get more capital. In other words, there were plenty of opportunities to buy into the market over a 5 month period.

To a degree, the same was also true back in the Market Crash of 1987, the dot com bust of 2000-2002, the 1973-1974 stock market crash, and of course the infamous crash of 1929, among others. You don’t really need to be in a big rush to buy, there is always time to move in. I’m not saying don’t buy equities now, far from it. I think it’s very prudent to be buying some now – just don’t spend everything. There may be more declines and opportunity to come.

Is Your Asset Allocation in Check?

One thing I do know for sure is I have a nice income generating and balanced portfolio which is priceless when stock prices go down. I could have easily gone with a 100% dividend portfolio in 2009, but I didn’t, I saw how bonds gave me a cushion and income through the decade. And to be honest I just didn’t have the guts to go 100% equities – that takes a lot of fortitude.

While my returns were not outstanding this year, it looks like my balanced and diversified approach has paid off. My entire portfolio is only showing a slight negative return for the year. It could have been a lot worse, but it isn’t. The reason of course is dividends and distributions, and a cushion of bonds.

Before you go buying up stocks left right and center, does your asset allocation include bonds? And if it does, ask yourself, are you in check with your asset allocation? If there are still more declines to come, you don’t want to be giving up on your bonds, or putting all your cash on the table with stocks.

Where Do We Go From Here?

I think that’s a really good question, and anybody who thinks they have the answer is either pure genius or bluffing. If you have cash then don’t go spending it all just yet, and “backing up the truck” too quickly. We may not be entirely “out of the woods”, especially with the U.S. credit rating downgrade on Friday. There are still a lot of debt concerns in Europe, and room for oil prices and other commodities to fall further. Of course, it’s always the unexpected that hits the markets – the one thing that nobody saw coming, and I doubt we have even seen that one yet. One thing is certain – next week is going to be very interesting.

Well here’s to a cold beer in summer, and a toast to markets on Monday 😉  Stay thirsty my friends!

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18 Responses to “Before You Backup the Truck”

  1. The Wealthy Canadian

    Aug 07. 2011

    I like the title 🙂

    Ninja, great job on providing some historical data during volatile market conditions from over the years. It doesn’t take long to forget where the TSX stood at it’s low – 7500 points in March 2009 raises eyebrows for sure.

    From a personal standpoint, I backed the truck up a fair bit this past week (but not over the edge), mainly because I was content with the companies I had chosen, as well as locking in with a solid overall yield with my positions.

    My positions are for the long-term (decades) and I think anybody who says they can always predict where the markets are heading are either incredibly intelligent or completely naive.

    Sitting on cash can be good in many ways; however, I think many ‘buy & hold’ investors that are seeking solid dividend- paying equities as part of their investment strategy in particular, like to see their money in action while getting paid to wait (in comparison to say having funds parked in say cashable GICs while waiting things out).

    I think this is often more prominent with investors who have an income-oriented strategy seeking to consistently increase their monthly cash flow stream.

    Nice thread!

    Reply to this comment
  2. The Dividend Ninja

    Aug 07. 2011

    @Wealthy Canadian

    Thanx for posting man. Believe me if I had the capital I would be buying as well, but keeping a nice chunk of it in a short-term bond ETF for income while I’m waiting. I think it’s still early days, but then again that’s just my guess.

    Cheers!

    Reply to this comment
  3. MoneyCone

    Aug 08. 2011

    The S&P downgrade was unexpected and the timing was rotten. This is going to be an exciting week!

    Reply to this comment
  4. spbrunner

    Aug 08. 2011

    I have a portfolio of 3.3% in cash and the rest in stocks. As of yesterday, I was down 1.8% for the year.

    Since I am spending my dividends I cannot afford to use my cash for buying stocks. But, I agree that it is a good time to do so.

    Reply to this comment
  5. The Dividend Ninja

    Aug 08. 2011

    Susan,

    -1.8% isn’t bad at all for a 100% stock portfolio. Obviously your dividend income is increasing your ROI. Nicely done 😉

    Reply to this comment
  6. The Dividend Pig

    Aug 08. 2011

    Great post DN – good advice. This market free-fall has been super exciting, but your right that there may be more to come. Dollar cost average in is the way to go!

    Reply to this comment
  7. DIY Investor

    Aug 08. 2011

    I agree that the advice is excellent. The downgrade ,craziness in Europe etc. will push politicians to act more responsibly. Great points on the cushioning role of dividends in this kind of market.
    My 2 cents…don’t try to pick the bottom!

    Reply to this comment
  8. The Dividend Ninja

    Aug 08. 2011

    @DIY Investor
    Robert thanks so much for posting 😉 I think your advice is worth far more than 2 cents – you are absolutely right, don’t try to pick the bottom. I’m just suggesting investors don’t put ALL there capital on the market all at once – some are.

    @Dividend Pig
    Welcome back. The Dividend Pig is bang on with his advice also – Dollar cost averaging is the way to go.

    Cheers!

    Reply to this comment
  9. The Dividend Ninja

    Aug 08. 2011

    @DIY Investor
    Robert thanks so much for posting 😉 I think your advice is worth far more than 2 cents – you are absolutely right, don’t try to pick the bottom. I’m just suggesting investors don’t put ALL there capital on the market all at once – some are.

    @Dividend Pig
    Welcome back. The Dividend Pig is bang on with his advice also – Dollar cost averaging is the way to go.

    Cheers!

    Reply to this comment
  10. Dividend Mantra

    Aug 08. 2011

    Great advice. This is a great time to average down on your positions and hopefully lower some cost basis. Purchase here and there, but be patient. I agree we have some time here. And that’s coming from a raging long-term bull. There is plenty of opportunity, but it’s an opportunity that doesn’t have an expiration date tomorrow.

    I have a little cash on the table, but I may wait a few weeks before making any more purchases. I also have a move coming up in a few weeks to a cheaper apartment. Horrible timing! I would much rather buy equities than rent a moving truck! 🙂

    Reply to this comment
  11. My Own Advisor

    Aug 08. 2011

    Great post, and I love IKEA commercials!

    I also like how you recalled history in your post: TSX down to mid-7000s in March 2009; the dot com burnout early last decade; Black Monday in October 1987; the 1973-1974 stock market crash and oil crisis in modern times. Bad things have happened before in the market and they will happen (are happening) again. Good time to limp in, take some low-hanging company fruit or simply hold the line with your equities. If you have bonds, now is the time to be thankful because this is why you own them.

    Simply another quality post Ninja 🙂

    Reply to this comment
  12. The Dividend Ninja

    Aug 08. 2011

    @Mantra
    Yah just keep buying in. You want to go for the consumer staples like WMT,PG,PEP,KO, and company’s like SYY etc. You know the deal 🙂 The Dividend Pig is right on when he says to DCA. I know you invest monthly positions, so you don’t need to change that – keep buying in as you can.

    Moving, yuck! 🙁 good luck with that.

    @My Own Advisor
    Thanx man! And yes I’m sure glad I have bonds. This is exaclty the scenario I bought them for 🙂 CLF-T is doing well, wish I had some CBO-T.

    Reply to this comment

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