It’s possible that you haven’t looked at your portfolio. It’s possible as well that you haven’t looked in the mirror. To not look at your portfolio might be a good strategy. I’ve heard from a few readers who offer that they will not look, just yet. But it’s certainly important to be aware. Your portfolio has likely lost some value. Today we’ll frame that for you with a look at the iShares one ticket asset allocation portfolios. How is your portfolio holding up in the recent correction? Let’s have a look at the recent performance of Balanced Portfolios.
If you’ve been awake the last week or two you know that we’ve had a quick and violent market correction. Here’s a wonderful post on the irrelevant investor that frames the market corrections over the last 100 years.
This chart says it’s the fastest correction ever.
That this is, the path to the initial 20% and bear market territory. Hey no worries there. If you’re going to tear off that band-aid, do it quick. And of course the chart is showing US stock market performance.
Don’t worry, markets have recovered quickly.
Of course charts are just flying around the web these days. There’s a stock chart for most everything. Of course, past performance does not guarantee future quick recovery. But …
We usually see these ‘good recovery’ charts after these ‘catastrophic’ stock market events. Why? Because stock markets mostly go up. But they deliver these shocks with regularity. But they haven’t barfed up a good one in quite some time.
Hope you don’t mind the analogy, that’s the first time I’ve used the B word on Cut The Crap Investing. And keep in mind, we have no idea if this correction is over, or just getting warmed up.
And I’ve previously stated that because the stock markets have been quite calm over the last 11 years, our risk tolerance level has drifted out of whack. That was not nice of Mr. Market to lull us into a warm place of relative calm and comfort and then crack us with the fastest correction, ever.
How did that feel?
That’s what risk assessment is all about. Feelings. Nothing more than feelings.
How did if feel to watch your portfolio decline by some 20% or so? I certainly hope that Cut The Crap Investing readers (and anyone who found this article) is OK. And it’s also OK to feel nervous and unsure, even scared. The key is to be aware of possible outcomes. We need a plan. We need the ability to stick to that plan.
Ben Carlson offers some random thoughts on a big down day in the stock markets.
These are the days when you don’t need financial advice, you need a psychologist. This is why managing people is always more important than managing investments when you work in the financial services industry. Anyone can build a portfolio. Not everyone can stick to a plan.
Ben Carlson
Ben also offered …
“Waiting for the dust to settle” is not a legitimate investment strategy. “What do I do now?” is not a fun place to be either?
More common sense from Ben
Yes investing is 90% psychology and 10% portfolio. It’s not that difficult to create a great portfolio. The other 90% is where too many get tripped up. Don’t get tripped up.
Got a plan – no sweat.
Awareness + Plan = Success
Of course that plan includes a portfolio that is aligned with your risk tolerance level.
You know stock markets can correct violently. That’s all normal and expected stock market (mis)behaviour. After all the stock markets are ridiculous as they proved recently. So you were prepared. The potential of your portfolio value to drop matches the amount you’re prepared to watch, and feel.
Of course we add bonds and other assets to work as shock absorbers. On February 1, before this coronavirus outbreak was really scaring the heck out of the asset managers who price the markets I offered up …
How to prepare your portfolio for the coronavirus outbreak.
Again, the hope was that you were already prepared. But if not, there were some options outlined in that post. Bonds, gold, long term US Treasuries, inverse ETFs and more.
So how are those traditional shock absorbers working?
We’ll look to the iShares one ticket asset allocation portfolios.
In the top two columns we see the stock to fixed income ratios.
- XEQT down 16.4%
- XGRO down 12.5%
- XBAL down 10%
- XCNS down 5.3%
- XINC is down 0%
Yup, and XINC is up for the year. Bonds are doing their thing. That’s a bond heavy portfolio.
And that rebalancing mechanism will have that fund selling bonds and buying stocks as they go ‘on sale’. If you have a lower risk tolerance level, there’s nothing wrong with a lower risk portfolio IMHO. It’s likely going to outperform cash.
Performance update to end of March 20.
- XEQT down 28.0%
- XGRO down 26.3%
- XBAL down 20.0%
- XCNS down 15.6%
- XINC is down 10.5%
The bond markets froze up and bond prices have been hurt from the original post of March 9 to March 20. The Core Universe Bond ETF XBB is down some 10% over the last month. Corporate bonds have taken a big hit.
Performance update to week ending March 27.
While stocks offered some slight recovery from the previous week, we also see that bonds performed well. There was some nice recovery in the bond heavy portfolios.
- XEQT down 24%
- XGRO down 19.4%
- XBAL down 16%
- XCNS down 12%
- XINC down 8.4%
Pick your risk level. There’s no guarantees on how well those shock absorbers will work, but perhaps take that stock market correction down another 20% or more. Take the above returns and multiply x 2. How will you feel?
Robo risk profiling.
Of course if you are investing with a Canadian Robo Advisor, your tolerance for risk was assessed. I hope you were honest. If so, you should be investing within your risk tolerance level. If you’re not sure, call in to speak with an advisor. You can call in as well if you’re with Tangerine Investments.
I know that our friends at Steadyhand picked up the phones on the first few rings, even in the busiest week of RRSP season. Please have a read of …
Most Canadian investors want advice. Many could use a Steadyhand.
And remember if you’re in the accumulation stage these lower prices are attractive. Historically, corrections are great opportunities. A seasoned investor will embrace these lower prices. You’re able to buy more shares, greater earnings and bigger dividends.
Most importantly I hope that you are not scared. This is normal stock market crap. Keep investing.
Please offer your recent experience. How did your portfolio holding up? And as Joey from Friends would ask … How you doing?
See you in the comment section.
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Dale
I really enjoyed this article. I don’t have much to add, other than to say there is a silver lining to all of this. As mentioned in the article, we haven’t had a major correction in a very long time, which means we really aren’t quite sure how risky our holdings were. Fund Fact documents rely on the past 10 years of returns when categorizing risk levels, and since this would exclude 2008 and 2009 this isn’t really fair. Not to mention the index makeup has changed a fair bit over that time period. You may be forgiven for thinking you’re in a medium risk category, for example, when in reality it is closer to high risk. When “the dust settles”, I’m very much looking forward to re-analyzing my holdings and comparing them with what I thought the risk was. I imagine I’ve miscalculated, but hopefully not by much.
Thanks Sunday Investor. You’re right though, some of the risk rankings are way off. This is an opportunity to benchmark against some sensible portfolios at various risk levels.
Thanks so much again, for stopping by.
Dale
Great post, Dale. On the whole, I’m not sensing a ton of panic from others. It’s more: is this a good buying opportunity? When should I buy in?
I’m hoping this is a sign that people like you are working your magic and people are finally getting educated on the normal gyrations of the market!
For myself, I’ve been waiting for a major correction/pullback/bear like this. As someone still in the accumulation phase, this is far more beneficial for us than a raging bull.
I look forward to investing more money in the coming weeks. 😉
Thanks Chrissy. Glad to read that. Yes, I think our self directed groups all practice good behaviour. I think it’s some wonderful group education. It might get tougher, but I think we can all help each other through it.
It’s a support group.
Keep on keepin’ on …
Dale
I am curious about who is doing all the selling that led to this rapid correction? It seems the consumer is told “don’t panic”, “buy and hold”, “don’t try and time the market” etc… But I can’t imagine that it is individual investors who led such a large and rapid decline. So is it the “pros” who are panicking and not taking their own advice? Maybe large trading houses rolling the bones on some quick profit? Is it pre-programmed stop losses a la HFT? I’d love to hear your thoughts Dale.
I have the same question as Morgan. Is it day traders? Individuals? Or institutions?
Thanks Morgan, so funny, I’ve just sent emails on this looking for more clarification. It’s certainly traders, institutional. Bots in the mix as we know. And certainly long term and mid term, active fund managers can take things off path by simply following momentum. They are known to do quick analysis and react to economic events as well.
It’s certainly something that’s been bugging me. I am working on an article on this. The mindless volatility is terrible and destructive.
I think traders should be removed. Give them their own market to play and waste time and money.
Dale
It’s definitely a very good question! It hadn’t dawned on me before, but yes – the collective wisdom seems to be to wait it out, but obviously that’s not what’s happening. From a management point of view, the most cost-effective (and easiest) thing to do would be to just sell index futures to hedge against your long holdings. That way you don’t have to deal with any of the high trading fees and potential tax consequences. Futures hedging is based on portfolio beta so these large swings may imply that there were a lot of portfolio managers with high-beta portfolios, and they were scrambling to reduce market exposure.
As for institutional portfolio managers, I’m not sure how frequently they use futures to hedge as I believe most of them have long-only mandates (Dale, please correct me if I’m wrong). If I’m right though and it is these investors doing the selling, this implies to me that perhaps their portfolios were being operated outside their investment mandate, which is a big no-no and will get you dropped in a quarter or two (especially with poor relative performance). The big movement of cash into bonds kind of supports this theory.
My guess is that it’s the institutional investors doing the selling. They’re all panicked about their jobs, which is based on peer performance rather than absolute performance. Maybe if they all cluster together during these bad times, everyone’s performance will be equally as bad and they’ll get to keep their jobs!
Dale, would be interested in seeing what you dig up. A very good question indeed.
Off 149K …. ’tis but a flesh wound.
Ha, can’t go wrong with a Monty Python quote. Thanks for that.
Good chance market history repeats. Patience as you know.
Dale
Yes, I’ve been looking every day – glutton for pain! I am in a CCP like VEQT with no fixed income so it’s been quite the ride (cue “Ride the Lightening”).
The thing is, I went through 2001, and my market value was cut in half in 2009, so even though the nominal figures are much greater for me today, percentage-wise its been smaller than past rides and that’s what I’m focusing on. While it’s not nice to see unfold, I’ve proven before that I can stomach it and focus on the long run. Selling out would trigger capital gains as well so I’m sort of handcuffed there too.
Ultimately I think Mr. Market is over-reacting but so many were clamouring for him to stumble that it was almost inevitable that something like COVID 19 would bring it on. My concern is that COVID will lead people to anticipate a recession so much that they cause a much worse one than the disease itself would warrant. Sigh, humans.
Thanks Bart. Yes it’s true that fear can lead to less economic activity and it’s self-perpetuating. It’s a perfect storm for now. We’re likely just in the first inning in North America according to experts. All we can do is be aware and be prepared. This will pass as every threat does. We just don’t know when.
Dale
Down about 10%. My reaction to Monday “Hmmm, that’s a biggish number” lol
Thanks jimmbboe. Yup, big number. But of course we should always be prepared for that possibility. I’d imagine you were.
We should also be prepared for things to get twice and three times as worse. That may or may not happen.
Thanks so much for stopping by. Your comments in future should now load automatically. I hope you’ll continue to keep us posted.
Dale
Good article and follow-up posts!
Anyone who invests for the future or in my case retirement income would have to be crazy to sell off now.
I wish I had sold off everything in January but my crystal ball was and still remains fuzzy so I will stay the course and continue to collect my monthly dividends.
Thanks Marko, yes, as I’ve penned we can forget what it feels like. But all normal and expected market behaviour. Nobody knows, but there’s likely much more to come. Hang on.
Thanks as always for stopping by.
Dale
Nice article. No I haven’t been looking at my stocks, but then I typically don’t look except once a month when I go into Questrade and transfer out dividends and look at the reports. Which I’ll be doing next week when I also have to download tax forms, so I figure I’ll wait and do it all at once when I know the reports are ready mid-month. I’m a set it and forget it. My investing focus is dividends for income. Growth is nice too. So as long as the dividends hold until things return to normal, I’ll be OK.
I don’t understand “margins” but I got an email today from Questrade saying one or more stocks I hold the margins and positions have changed, and they have the right to call in a margin. I’m guessing this means people who have borrowed money to buy stocks. Which I have not done so it doesn’t affect me, but that might be a good article topic.
Hi Cheryl, sorry I missed this comment. Glad to hear that you are well. And yes many invest on margins, and that’s why we get some of those violent moves in the market, when those are called and folks have to sell assets to pay those debts.
I am not a fan of borrowing to invest. Though a few can do that with success.
All the beat, have a great weekend.
Dale
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