Keep Calm and Steady

Today the selloff continued on the TSX, with 220 declining leading 26 advancing issues. Energy and commodities, a large component of the TSX, led the selloff with telecoms being the harbour of safety. The TSX is currently down another 245 points today to 12,138 (see TSX chart below), with two hours still left in the trading day.

S&P TSX Composite

That follows monumental losses yesterday where the markets were walloped with huge sell-offs, the TSX Composite Index down 435 points or -3.4% in one day. And the DOW was hit also, down some 512 points or down over 4% just in one day as well. The TSX is already off some 1750 points from its March and April highs. Everything is down, and it looks poised to continue into next week.

In this post, I remind you to keep your focus, don’t do anything sudden, and don’t get caught up in the stress and panic. When everyone else is selling in fear, and selling at a loss, it is often the best time to buy. If you have an investment strategy in place, then you really don’t need to panic. You likely have opportunity built right into that plan, whether it’s rebalancing or purchasing new shares/units at discounted prices. 😉

The Writing Was on the Wall

You don’t need to be a market guru to know we were in for some type of market correction. It’s been blasted in our ears by almost every guest on BNN (Business News Network) over the last few months, by various business media, and by those tacky AdSense Ads on my website – “The Market Crash of 2011: Sell Everything Now!”

I wrote about investor sentiment and increasing commodity prices back in March. The warning signs were all around us in late 2010 and early 2011: U.S. and European debt woes, oil over $100 per barrel, gold at all time highs, global food inflation, and soaring stock prices since 2009. It’s not the first time we have had market euphoria or turmoil and it won’t be the last – that much is certain.

What we really have no way of knowing of course, is where we are on the curve. Is this a major correction in a raging bull market, or the start of a major meltdown and impending bear market? Who really knows, and you really shouldn’t be speculating on that anyway. Throw out your thoughts of what you think is going to happen, and any other theories for that matter, because you will likely be wrong.

Stay Cool!  Stick With the Plan  

If you’re an established investor you already have a plan, whether its passive index investing, passive dividend investing, or a combination of both, and you stick with it. You don’t let market events sway your plan or strategy, and you don’t react in panic or fear. It’s that simple!

I wrote about this point, back during the Japan Earthquake and resulting market declines in The Japan Effect.  The biggest mistake for investors is emotionally reacting to world and market events. It really doesn’t matter what your investment strategy is. Having a plan to begin with and keeping calm in times of turmoil is the key for investment success. That means not being in a rush to sell, or change your strategy on a moment’s notice.

What Am I Doing About It?

To be honest, I’m not really doing much, because I simply don’t have the working capital to invest and buy everything on sale – but I sure wish I did. Within a few days my watch list has grown from 5 to 20 stocks! And I’d like to top-up my equity index funds as well. However I do have a nice chunk of bond funds /ETFs to cushion the blow, to provide income, and potential capital.

I don’t view market declines from a fear-based perspective anymore. In fact, I happen to like market declines, or market slides for that matter, as do some of my friends and fellow bloggers. The more the market slides, the more opportunity is around the corner. Everything is going to be on sale once again, maybe 20% to 40%. I’m looking forward to picking up the pieces – when or wherever the bottom may be.  No one likes to see their current stocks go down in price of course, and neither do I, but I have an investment strategy in place that helps me deal with both rising and falling markets. And that is perhaps why I really don’t feel stressed out.

But I didn’t always feel that way about market declines, especially when I held equity mutual funds. While my bond funds did well, like the majority of Canadians, I’d just sit there and watch my equity funds lose value and feel the fear of the crashing market.  But now I rely on dividend income and bond distributions to grow my portfolio, and I’m seeing the benefits of that strategy in both rising and falling markets.

The Delight of Dividends & Distributions

For those of us who invest in dividend paying stocks, regardless of the ups and downs we always know we have that stream of dividend income. And it’s much the same scenario with Bond ETFs and bond funds as well.  Those distributions from bond ETFs are as important as dividends are to a dividend investor. It’s called income, and it’s something you just don’t see while holding mutual funds.

My portfolio currently yields 4.69% from my stock and Bond ETF/fund holdings, and I either receive monthly distributions and/or dividends. This income generating and balanced portfolio is priceless when stock prices go down. I was reminded of this today when I noticed a few of my stocks were down over 10% to 15%, but my ROI (return on investment) for my entire portfolio is still positive. The reason of course is dividends and distributions, and a cushion of bonds.

The Cogs in the Machine

An investment strategy is much like a machine, and it’s made of several cogs on a wheel that all work together. When markets decline sharply, my investment machine of bond ETFs/funds and dividend stocks, gives me peace of mind and stability. Here’s how it works:

  1. I get to buy more of my favourite stocks on sale during the decline.
  2. I get to take advantage of low prices and top-up my index equity funds.
  3. My bond funds and bond ETFs cushion the blow, rising in value, and providing income.
  4. My bond holdings are working capital. I can use this capital in the future to buy cheap stocks and more equity index fund units, at much discounted prices.
  5. I have income producing ETFs and dividend paying stocks instead of declining mutual funds.
  6. I have time on my side. I do not feel rushed to make a panic decision.

Since I’m not a millionaire, I’ll buy what I can and continue to top-up my index funds. And of course I will stick with my asset-allocation and long-term plan 🙂

Conclusion

In conclusion, most investors are starting to panic because they don’t have the financial tools or an investment strategy already in place. One thing is certain, there are going to be some great bargains in the days and weeks to follow. As my favourite TV commercial says, “stay thirsty my friends.” 🙂

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29 Responses to “Keep Calm and Steady”

  1. Joe

    Aug 06. 2011

    Hi Dividend Ninja,

    Can you share with us your watch list..

    Thank you so much
    Joe

    Reply to this comment
  2. The Wealthy Canadian

    Aug 06. 2011

    I almost fell off my chair when I read your final comments, “stay thirsty my friend” 🙂 I like that commercial a lot.

    Great post. Like you, my stock watch radar went off the charts this past week. I found myself dipping in the markets and scooping up large cap dividend-paying stocks to the best of my ability.

    I might have backed the truck up a bit too much given the global economy, but the yields I locked into made me quite happy. I’m mainly a buy & hold ’till I die type of person so I’m in these positions for the long-haul.

    Your right, telcos were the darlings yesterday and ENB had some great news this week.

    I love your analogy about the ‘machine’. It couldn’t be more true. Once that engine is running and you’ve got your monthly cash flow stream increasing over time, it purrs like a kitten. It’s a thing of beauty IMO, and cash is king.

    Nice post!

    Reply to this comment
  3. The Dividend Ninja

    Aug 06. 2011

    @Joe
    Thanx for posting. I would be pleased to do that. 😉 I actually have a post planned on my top-picks this weekend. And even better than that I have been working on my Top US and Canadian Stocks which will become regualr posts – I’ve been meaning to do that for a long time now. Thanx for the push!

    @Wealthy Canadiann
    Thanx man! If I had the capital I would be backing up the truck as well 🙂 You and I have no way to know when or where the bottom is, but when opportunity knocks it’s worth taking. Well done.

    I’d love to take the credit for the “machine”, but Lowell Miller does a much better job in “The Single Best Investment”. Readers, if you are a dividend investor and you haven’t read Miller’s book, you should get yourself a copy.

    Reply to this comment
  4. Dividend Mantra

    Aug 06. 2011

    I agree! Have a plan and stick with it through highs and lows. It’s easy to be an investor when the market is trending higher day after day. It’s times like these where you really have to take a long look in the mirror and define yourself.

    On one hand, I’m a little disappointed I don’t have more capital to “back the truck up” with. On the other, I don’t think the market is going to rebound significantly any time soon. We have time to get into this.

    It will be an interesting Monday after the downgrade. I’m looking forward to further drops, if we see them!

    Have a great weekend.

    Reply to this comment
  5. The Dividend Ninja

    Aug 06. 2011

    @Dividend Mantra,

    Agree with everything you said here: (1) It’s easy to buy stocks when markets are climbing, and (2) There will be time to buy more 🙂 Next week will indeed be interesting.

    Wishing I had the capital to back the truck up as well!

    Reply to this comment
  6. The Dividend Ninja

    Aug 06. 2011

    @Dividend Mantra,

    Agree with everything you said here: (1) It’s easy to buy stocks when markets are climbing, and (2) There will be time to buy more 🙂 Next week will indeed be interesting.

    Wishing I had the capital to back the truck up as well!

    Reply to this comment
  7. RobSol

    Aug 07. 2011

    Hi,

    Been reading your blog for quite sometime now, and this post is so encouraging. I was fortunate to dump most of my aggressive MF inside my RSSP lately and bought some etf and dividend paying stock. Although bought them on their high, i’m not that too worried some of them now are 10% lower because i bought them again. I started investing etf and stock last April accumulated around 10 before the slides and bought 6 since yesterday.
    Thanks for some of the knowledge you’re sharing here.

    Reply to this comment
  8. My Own Advisor

    Aug 07. 2011

    Hey Ninja,

    Great post. I loved the references to Miller’s book; the machine and how you personalized it by explaining how your own cogs work 🙂

    Yielding 4.69% is very tidy. Well done! This is proof that whatever inflation has to throw at you, you’re going to get by just fine.

    Reply to this comment
  9. MoneyCone

    Aug 07. 2011

    Everytime the market falls I hear ‘Attention shoppers..’!

    Reply to this comment
  10. The Dividend Ninja

    Aug 07. 2011

    @RobSol
    Thanx for dropping by man, and taking the time to post – love hearing from regular readers. You made the right move selling your underperforming and overpaid mutual funds (wait until you see my post on that), and just in time I might add. Imagine where you would have been if you were still holding those dogs?

    Now you will be turning over a 3% to 4% yield on dividends, and that really helps when markets tumble – you still get paid 🙂 Make sure you buy quality and keep those puppies forever so you get the benefits of compounding dividends over time. Its easy at -10% but it takes guts when markets go down -30% or more…Just remain steadfast and stick with the plan.

    I sure hope you also are keeping some bond ETFs and bond funds as well, a percentage around your age. That has really helped me cushion the blow. In fact it saved my bacon in 2000’s, 2008 and 2009, and its going to save it again.

    PS
    Don’t get too greedy and “back up the truck too quickly”, we really don’t know yet if this is a short-term blip in a bull market, or the full monty of another crash. Best to hold some bonds and cash on the side.

    Reply to this comment
  11. The Dividend Ninja

    Aug 07. 2011

    @MoneyCone
    Let’s go shopping man! But don’t “back up the truck” too quickly 🙂 I find it hilarious when grown men talk about shopping with such enthusiasm.

    @MOA
    Yah a 4.69% yield is pretty nice! Unfortunately that comes with a couple of high-yield dividend payers, which have already tanked, and a chunk of corporate bonds (which I’m watching carefully). But it’s irrelevant!

    Currently some of my stocks are down nearly 10% to 15% (-9% overall). However, through dividend income, bond distributions, and a cushion of bonds, my entire portfolio is only at a slight loss 🙂 I’m glad looking back I was more cautious than aggressive.

    Reply to this comment
  12. Good post!

    I only bought JNJ and KO recently in my RRSP. Now, I am looking at deploying some more cash. Unfortunately, they aren’t crazy amount so I am going to add through the Transfer Agents and accumulate fractional shares. More banks and more utilities 🙂

    Reply to this comment
  13. I love this post! You’re absolutely right; the market is on sale once again. The best strategy is to stay calm, maintain your strategy, don’t sell in a panic, and (if you have a little extra cash floating around) take advantage of the sale!

    I added some commission-free ETFs to my portfolio, buying a small number of shares per day, each day, over the past week.

    Reply to this comment
  14. The Dividend Ninja

    Aug 07. 2011

    @Paula
    Thanx for dropping by! I will also be adding small positions over the next few days and weeks 🙂

    Readers, Paula also wrote an exceptional post on the recent market slide. It’s really worth checking out:

    http://afford-anything.com/2011/08/05/what-to-do-when-the-market-falls/

    Reply to this comment
  15. The Dividend Ninja

    Aug 07. 2011

    @Paula
    Thanx for dropping by! I will also be adding small positions over the next few days and weeks 🙂

    Readers, Paula also wrote an exceptional post on the recent market slide. It’s really worth checking out:

    http://afford-anything.com/2011/08/05/what-to-do-when-the-market-falls/

    Reply to this comment
  16. Alan Booth

    Aug 11. 2011

    Todays post and the recent articles are very useful (and calming) in this market. Today is my 3rd day buying-fortunately I got in early today-and am keeping my powder dry if another opportunity to buy lower occurs.
    Its taken me decades to learn to buy low when the consensus is so negative and I always use fear as a buy indicator.
    Thanks for the useful and common sense post.
    AZB

    Reply to this comment
  17. Alan Booth

    Aug 11. 2011

    Todays post and the recent articles are very useful (and calming) in this market. Today is my 3rd day buying-fortunately I got in early today-and am keeping my powder dry if another opportunity to buy lower occurs.
    Its taken me decades to learn to buy low when the consensus is so negative and I always use fear as a buy indicator.
    Thanks for the useful and common sense post.
    AZB

    Reply to this comment
  18. Celesta Financial

    Aug 19. 2011

    I agree with you. Staying calm on a roller coaster may not be easy but having been through some major market corrections I have learned not to panic and to hang on for the ride if holding value stocks. See my blog post at
    http://celestafinancial.blogspot.com/2011/08/turbulence-in-markets-heres-strategy.html

    Reply to this comment
  19. The Dividend Ninja

    Aug 19. 2011

    @Celesta Financial
    That is an excellent post! I especially like your emphasis on Quality Dividend Paying stocks, and the safety they provide. I also like the fact you listed them for readers, a great selection 🙂

    Readers, check out the post above by Celesta Financial.

    Reply to this comment
  20. Celesta Financial

    Aug 27. 2011

    Well said, Dividend Ninja. A dividend-paying stock pays you a “nice” reward for buying into a staid investment that even your grandmother would like to own. Slow and steady wins the race! If you have some mad money you are prepared to lose then go ahead and buy something that could bring you either euphoria or despair, depending on the whims of the market. It’s OK to speculate and have a little fun and excitement when investing but only with money you are prepared to lose.

    Reply to this comment
  21. The Dividend Ninja

    Aug 27. 2011

    @Celesta Financial, thanx a lot! 🙂

    Reply to this comment

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