Investing During Market Declines

Stock Market DeclinesThe recent and sudden market slide had nearly all investors caught off guard. Although markets appear to be rebounding, some investors are feeling stunned and discouraged. Others feel like little kids in a candy-store, buying everything in the bargain bin. For those retirees who were decimated during the 2008-2009 financial crisis, another severe market decline or double-dip recession may just be too much. According to a recent Globe & Mail article, some of the wealthiest investors have already thrown in the towel. I’m here to tell you otherwise.

Don’t Panic

Market declines are part of the process of investing in equities, after all “what goes up must come down.” We’ve had a pretty good run on stock prices and commodities since early 2009, so we shouldn’t be surprised to see the market blowing off some steam, whether it’s the big one, or a correction in the middle of a raging bull market.

In fact, the TSX Composite Index has actually been in a down trend since May 2011, off its highs of 14,200+ back in March and April. To give you some perspective, back on March 2nd, 2009, the TSX Composite Index closed at its low of 7,591 at the tail end of the financial crisis. That’s nearly a 90% gain in two years!

Don’t Sell Anything

Don’t sell anything! If you have a large chunk of bonds in your portfolio, then keep them. It’s tempting to start selling bonds now to buy equities, but it’s still early in the game. You’re going to need the cushion and income those bonds will continue to provide. And worst of all don’t sell your stocks or mutual funds when they are down, patience will go a long way. Down the road you will recoup the prices on your stocks or funds, but not if you sell them at a loss.  In fact, keep adding to them on the way down, and lower your average cost. This strategy, while hard for most people to do, will also increase your gain when markets rebound.

Buy Equities Now

As bull markets are the best time to buy bonds, market declines are the best time to buy equities! It’s like going to the dollar-store to buy quality brand name items. Right now, and probably in the weeks or months to follow, you can get the best dividend paying stocks at 10% to 20% less than they were a month ago. Wal-Mart, Procter & Gamble, Johnson & Johnson, Coca Cola, and Pepsi, among others are on sale. These are solid giants that have weathered countless recessions, and they pay dividends! Or if you have index equity funds, then keep topping them up. Just don’t be in a rush to buy everything now, since we really don’t know where the bottom is.  Buy smaller positions, or even index funds and ETFs, over a period of time.

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Were You Balanced?

If you were one of the wise investors who learned from the 2008-2009 financial crisis, you probably learned to be more cautious. You learned that holding a percentage of bonds at your age was a good idea, since bonds give you a cushion during falling markets, as well as income. You probably also learned that dividend stocks pay! Unlike equity mutual funds, large-cap dividend paying companies provide you a stream of dividend income, regardless of their share price. In fact, the dividend yield increases as prices drop.  Having a diversified portfolio with solid blue-chip stocks and bonds, which provide dividends and income, is a godsend in market-declines like these.

Here are my latest two posts on the recent market decline:


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16 Responses to “Investing During Market Declines”

  1. MoneyCone

    Aug 11. 2011

    Bought a few low PE stocks, but did mentally prepare for a sustained dip. Time will tell..!

    Reply to this comment
  2. The Dividend Pig

    Aug 11. 2011

    I would add in MMM and ITW – both has lost tons of value, yet business has not changed in 2 weeks. I love market dips!

    Reply to this comment
  3. Dividend Mantra

    Aug 11. 2011

    I love buying my favorite companies on sale. I’ll have some available capital soon, but I am going to be cautious for once. The market is so topsy-turvy that it’s hard to get a feel for where things are going. The volatility index is extremely high and volume is way up. That tells me traders and machines are all over this right now. Perhaps a little manipulation in the market?

    At any rate, I agree with all the advice. Stay steady and don’t sell anything. Use capital wisely and buy quality on sale!

    Thanks Ninja!

    Reply to this comment
  4. My Own Advisor

    Aug 11. 2011

    Nice post!

    I wish I had some cash, but I don’t. I’m fully invested. I bought some REI.UN for my RRSP a few days ago, to ensure that stock can DRIP at any price below $30.

    With that purchase out of the way, I’m now saving up for U.S. dividend-payers in my RRSP. I think this roller coaster is going to last for some time, so I think we’ll have lots of chances months down the road.

    The DJIA on Aug. 13, 2010 was about 10,300. Equities aren’t really that cheap right now, but they are less expensive than before which always makes buying equities more enjoyable!

    Your last section, were you balanced? is an excellent reminder for folks. Nice stuff Ninja :)

    Reply to this comment
  5. The Dividend Ninja

    Aug 11. 2011

    Thanx for the comments everyone :) Like Mantra says, even if I had a pile of cash right now, would I be rushing in? Food for thought isn’t it. MOA is right, we are likely going to be in for a roller-coaster this month and probably next.

    Cheers!

    Reply to this comment
  6. Michel

    Aug 13. 2011

    In my case,buying on the way down is one of the hardest action to do, and I have been at this for 18 years. Actually, I just can’t do it. I did buy in 2009 when the market started to pick up (in April) but that’s it!

    Congrats to you investors who can do it. I’m inrolled in DRIP’S so I don’t have to physically buy during a downward spiral. During the crash of last week and early this week, all I felt like doing is sell to preserve my gains. But I did not do it. :)

    Reply to this comment
  7. The Dividend Ninja

    Aug 13. 2011

    Hi Michel,

    I’m glad to hear that you didn’t sell! Most investors feel the need to react and do something when prices drop, but it really is the worse thing you can do – selling at the bottom. The best thing you can do is to buy in or simply do nothing. It’s so hard for most investors to do!

    I sure wish I had the captial to invest, becuase prices were oh so cheap last week. However I’m below my target for bonds, so that is where I will be topping up.

    Speaking of which, your portfolio should not cause you stress. I’m guessing you have a 100% stock portfolio… Have you considered adding some bonds to smooth out the ride? – though they are a little expensive after last week.

    What I like most about my balanced portfolio, is I really don’t have to worry or react to market events at all, it takes care of itself :) Back in the days when I had mutual funds, I could not say the same thing.

    Cheers
    The Dividend Ninja

    Reply to this comment
  8. Michel

    Aug 13. 2011

    Thanks for the reply! Yes I’m about 95% Equities. Although I have a very good pension, I shall add to my bonds. Thanks.

    Reply to this comment
  9. I’ve been buying a little bit every day, which means I’ve been capturing stocks on the way down. (Obviously, I’m buying commission-free ETFs, so I’m not paying money for the trades).

    Reply to this comment
  10. The Dividend Ninja

    Aug 15. 2011

    Paula, that’s the way to do it ;) Cheers!

    Reply to this comment
  11. The Wealthy Canadian

    Aug 16. 2011

    Excellent tips.

    I think the one that really hits home is your question,”were you balanced?” I think a lot of people (myself included) learned a lot form the cataclysmic economic events of 2008-09.

    Although I have not modified my overall portfolio to include bonds, I did ensure a minimum amount of guaranteed investment vehicles as a percentage of net worth.

    By doing so, you’re sure to minimize the pain when a future landslide comes around.

    I’ve been adding positions lately but actively seeking bargains before committing.

    Great post! Definitely going to be included in my round ups. :)

    TWC

    Reply to this comment
  12. The Dividend Ninja

    Aug 17. 2011

    TWC, thanx! :)

    Reply to this comment

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