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.
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:
- I get to buy more of my favourite stocks on sale during the decline.
- I get to take advantage of low prices and top-up my index equity funds.
- My bond funds and bond ETFs cushion the blow, rising in value, and providing income.
- 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.
- I have income producing ETFs and dividend paying stocks instead of declining mutual funds.
- 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 🙂
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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