Yes, we are in a bear market. And a recession is all but inevitable. It’s tough when we are in the moment, but this is all ‘normal’ stock market and economic behaviour. All bull markets must come to an end. Continued economic growth is not inevitable. Recessions appear with regularity. So here we are. We want to protect our personal health (and that of family, friends and neighbours). We also want to protect our financial health. Do you have a bear market investment plan?
And of course nothing is more important than the steamrolling tragedy known as the COVID-19 outbreak. To help our country and our economy, the most crucial thing you can do is self-isolate and practice that unsocial distancing. That will enable us to flatten the curve. I love how our chief medical officer framed it.
The way we contain the economic damage and the personal financial hardships is to plank the curve. This is a health crisis that creates economic damage. But it is damage that is repairable. As I penned on Thursday I know we will get through this. Please have a read of …
Do you believe in the human spirit?
Usually when you go to war, you are asked to risk life and limb. Dr. Lam is only asking us to create a massive dent in the couch and watch Netflix.
Of course eat well and exercise all while practicing that ‘unsocial distancing’ when you are out and about. We still need to shop. We still need that fresh air and sunshine.
What’s your investment plan?
For years years I have been continually writing about investment risk on Seeking Alpha. That has made me a not-so-popular and not well-read author on Seeking Alpha, at times. After all, we were in the longest-running bull market in history.
The most common theme has been – invest within your risk tolerance level. There is nothing more important. And I often suggest that the stock markets give us a warning shot every now and then. They give us a little love tap so that we can experience what it feels like (again) to watch our portfolio values decline.
Even in 2014 I asked if readers had a written plan of attack for a real correction .
Even COVID-19 (then going by the name of coronavirus) induced a little stock market love tap in late January. How did that feel? We should always be prepared, but I understand that our risk tolerance levels have drifted out of whack. We may not be as emotionally prepared as we think. So on February 1st I offered to Cut The Crap Investing readers how they might prepare for the coronavirus outbreak.
That was posted before the stock markets tanked. Was I clairvoyant? No. I simply thought the viral threat was real and could possibly cause a stock market correction. I obviously had no idea that it would get this bad. At the same time, I am not surprised. It appeared obvious to me in January that there would be a global outbreak.
What will you do next?
If you were already investing within your risk tolerance level you might also have a simple plan. You are investing on auto pilot. You are adding monies on a regular schedule. Applause. Applause.
Of course, no one knows where the market bottom might be. And market timing simply does not work. If you’re investing on a regular schedule you will likely be that rare bird that invests at the market bottom and all along that bottom trough. The market timer will not catch that bottom.
That said, as I had suggested in – Is this an incredible investment opportunity or what? Lower prices are certainly great, but I’d guess that they might get even ‘better’. Some investors are sitting on decent-sized piles of money. They might ensure they save some monies for when investors offer up the ‘big puke’. Sorry for the analogy. That’s the event when most investors run and hide. You’ll see stock market volumes spike to incredible levels as most everyone heads for the exits.
That may not happen. But it seems likely. Epidemiologists and health experts tell us that we are likely only in the second or third inning of the COVID-19 crisis. We have not seen peak cases and peak deaths in North America. And quite frankly, US citizens are not really taking this seriously yet. They don’t really care about these kinds of charts.
The US is setting records for new cases growth rates after the first 100 cases. It does not take a genius to see where this leads. It appears that Americans will only take notice when they see the frightening images on TV, and online.
Here’s some non-geniuses on Spring Break.
Those masses from the beaches are now on their way home to give some presents to Mom and Grandma. Ditto for Canadians heading home from March break vacations.
Wait until Warren Buffett gives the attack signal?
Of course Warren Buffett is the greatest investor of all time. He loves buying companies when there is panic. Mike Philbrick of Resolve Asset Management knows that I own shares of Berkshire Hathaway. It’s part of our overall risk management strategy. For more background on that here’s why the timing might be perfect to own Berkshire Hathaway. That’s one way to keep stock exposure but have nearly $150 billion in cash in the hands of the world’s greatest investor.
Invest like Warren Buffett.
Mike had suggested that while you can invest with Warren Buffett, why not invest like Warren Buffett? Wait ’till the world’s greatest investor goes on the attack? He may start to nibble along the way. You’ll hear press reports of when he’s getting very aggressive. Berkshire holdings are reported every month.
Of course, the risk is that we don’t get that massive sell off. You’re left holding that bag of money. But you’re in good company with Mr. Buffett.
Again, very few would criticize you for investing on a regular schedule. That’s what most of us preach on a weekly basis. You might also have a plan to invest a certain amount of dollars at each stage of market decline. You only want to go value hunting. And that’s certainly a bet. That may pay off or not.
If you buy individual stocks, have a plan as to what companies you want to buy or add to. You might pay attention to sectors as well. Don’t be floundering looking for ideas. Know what you want to buy, and when.
Can you take more portfolio pain?
That may be the most important question. While markets may hold steady or even go up from here, anything is possible. It seems likely that we are in for more pain. While Canadian markets are down about 33% and US markets are down some 32% we may see future declines of another 10%, 20% or more. It might take many years before markets recover lost value.
While I’d suggest you stay invested and have a reinvestment plan, if you cant’ take it, you can’t take it. You may decide to de-risk your portfolio in some manner. I’ll be back with a post on that topic, soon.
Thanks for reading. Stay safe. We’ll limit 0ur contact to the comment section. Do you have a bear market investment plan?
And certainly Canada is not out of the woods. We have to continue planking.
Have a great weekend.
Dale
Hi Dale,
What do you do when all asset classes start selling off at the same time? I have scary thoughts of Cyprus 2012-2013 when the government siezed unregistered assets of normal citizens, to help pay government debt. My Uncle is a big fan of holding some gold (but that side of the family lived through both wars, in Berlin, and through the hyperinflation). Could the same chaos happen here, and happen today? I don’t hold gold currently.
Do you know of any ‘safe’ places to hide?
My ‘Bear’ market plan was holding ultra safe AAA and AA goverment bond funds for my Fixed Income portion (CLF and CLG). I also thought REIT’s might be a good place to hide with interest rates declining…yup…that was incorrect. Oh well…I’ll have to wait that one out. I pulled back my equity exposure to 30% awhile ago, as I thought the markets were a bit frothy. I missed gains, so not sure if I am further ahead or not.
I still have a bit of cash on the sidelines; I think I’ll just wait it out at home.
Claudia
Hi Claudia it sounds like you have a conservative portfolio. I think we start with the basic building blocks as per core portfolios of Canadian, US and International stocks, and then those bonds. I am a fan of US treasuries. There’s no denying the diversification benefits of gold, long term. Many, like my friend Arthur Salzer of Northland Wealth Management also like a little bit of bitcoin for his clients – higher net worth. I like the ideas of REITs as well. This is not advice as well. We have to be comfortable with our own mix and why we hold.
I think there is opportunity in adding to equities as the prices crumble. That may be the greatest opportunity. But we have to be brave and ready to hold through thick and thin.
At times there’s nowhere to hide. We’ve seen stocks and bonds and gold fall recently as folks sell most everything. I think it will be different when the sellers and speculators are in hiding.
Be safe. Feel free to reach out.
Dale
Dale, Does the following sound like a crazy strategy, or a well reasoned plan?
I have 5.5 years worth of mixed fixed income (plus 2x that in equities), and I plan to retire in 5 months. I’m tempted to sell 1.5 years’ worth of my fixed income and invest it in equities. I’m thinking that even if these equities drop another 50%, and I have to sell in my 5th year, then I’ve only lost 0.75 of a year’s worth of money.
Hi Bob, I would not do anything too aggressive even if we sense some long term value in equities. Of course it’s impossible to give any kind of opinion on this without knowing your entire situation. Have you seen a retirement specialist? They can run the models for you, and the most important part may be the financial plan that includes the plan for the strategic order and draw down rates of various buckets from RRSP to TFSA to Taxable, Pensions and other amounts.
Happy to help you find someone if you have not received that advice. Crucial for retirement planning IMHO.
Dale
Although I am largely riding the waves, I was wondering if we hold low-beta investments, where we were wavering on keeping them, would it make sense, to sell these now and buy into high-beta stocks, anticipating they will rebound higher. Perhaps doing this through an ETF mitigates some risk of the practice of trying to time the market.
Hi Rick, I think sticking to your plan will be more important compared to tweaking the ‘type’ of stocks that you hold. My idea was to build the portfolio that I wanted to hold well before any recession, through the recession and coming out of the recession. And with a plan to execute through the correction.
There is likely to be incredible value in all baskets of good companies.
If you’re in the accumulation stage perhaps you’d look at adding new monies to the growth ETFs that you find attractive.
I would not be a fan of massive flips between assets. It’s a time for consistency and calm and measured execution IMHO.
Dale
As a retiree I had already set up the bucket style of one years’ expenses as cash, 3 years in GICs. I guess that’ll hold me for 4 years. My portfolio is down just now but I don’t need to touch it. Perhaps we’ll be out of the bear by then.
I recently sold Toronto real estate and planned to dribble the proceeds into Canadian, US, international equity index funds and bond index funds over time, according to my asset allocation. The market seemed too high so I didn’t want to toss it in in one swell foop. Now it has dropped and I’m thinking, “throw it all in now!” But then fear kicks in. My gut says sit on it. Dang. My gut and brain are fighting. I guess I’ll go back to first plan and dribble it in, dollar cost averaging style. I’ll have to automate it, because my gut jumps in to stop me every time I try to buy.
Thanks Jody, I like the idea of getting in, in case markets do go up (you participate and win). If they keep going up as you DCA, no worries you’re still winning. You only have opportunity costs, but you managed the risks. If markets go down you get those lower prices that you wanted (win). You can take your gut and brain out of it. That said I’d be careful with the overall asset allocation.
You certainly still want that cash and bonds, perhaps other risk managers.
I’d suggest a trip to a retirement specialist, fee for service. Most need advice at retirement stage.
Thanks for stopping by.
Dale
Another timely and thought-provoking article as usual. I believe everyone should have a written investment policy statement. It needn’t be complicated. Write it on the back of an envelope. Don’t lose the envelope. Maybe use it as bookmark. My policy statement is written in a note in my iPhone. Here it is: for my retirement accounts, RRIF and LIRA, no less than 40% fixed income (quality bonds) and no more than 50%; for my TFSA, no less than 30% and no more 40%; for my non-registered, no less than 20% and no more than 30%.
My bear market plan can be summed up in one word: rebalancing. Until this recent decline, it all worked marvelously well. Every time stocks sold off sharply, my bonds rose. I always knew that bonds have periods of positive correlation with stocks, but I never expected them to take such a hit. This time around, I couldn’t sell bonds to rebalance without suffering capital losses, which I refuse to do. Fortunately, I have a modest teacher’s pension. That plus CPP and OAS will enable me to meet current expenses. I just won’t be able to go out to restaurants every week. Hmm. The restaurants and bars are all closed anyway.
The problem with my strategy is that I have left myself feeling a little vulnerable. I have no cash. There are two schools of thought: cash is trash and cash is king. Unfortunately, I have always been a disciple of the former. Some financial planners advocate building a 5 year GIC ladder. My sister-in-law is a stockbroker and that’s what she suggested. I just cannot bring myself to do that. At a 4% withdrawal rate, that would mean 20% of my portfolio in illiquid assets making it hard to rebalance. I suppose another solution would be an online high-interest savings account with several years living expenses. That doesn’t appeal to me either.
Here is my plan going forward. I am still above water in some of my bond ETFs so I could always raise a bit of cash. I can always allow my dividends to build up without immediately reinvesting them. And I have the luxury of waiting. I don’t have to sell anything. In future, I am thinking of keeping 5% of my retirement portfolio in cash. No money market fund, no high-interest savings account, just cash which I can deploy in the blink of an eye (or with a click of the mouse). I welcome your thoughts, Dale.
Hi David, yes if you’ve been in those bonds or bond ETFs for a while you should have some nice gains. Sounds like a plan to raise cash from the dividends and bond income. And markets have been violent on both sides. You might get some capital appreciation opportunities if bonds have those good days. I’d imagine you’re in bond ETFs?
That said a simple and well-balanced portfolio historically will provide retirement funding by trimming from both stocks and bonds. In down markets you just might be more cautious perhaps create income at a 2% – 3% spend rate.
And again, I’d suggest advice from a retirement specialist. Fee for service.
Happy to look at your mix if you want to send a note through the contact form.
Dale
Yes Dale. All I do is ETFs. Thirty years ago I traded stocks. I doubt that I will ever hold individual stocks again. I much prefer the diversification of ETFs. I always despised mutual funds because of their abusive fees. For me, there never was any crap to be cut! I enjoy your blog so much that all I have to do is type the letter C in the search bar and it pops up immediately.
I am not sticking to my rule because, in fact, my retirement accounts have 52% fixed income. I feel like waiting a bit in the fond hope that bond prices will improve. Perhaps volatility will settle down in a little while. Speaking of bonds, I cannot help but think that the recently proposed fiscal stimulus packages are putting pressure on bonds. If governments are forced to spend too much, perhaps bonds will be downgraded.
I take comfort in an article by Ben Carlson entitled “What if You Retire at a Stock Market Peak? He shows that a 60/40 portfolio would have come through the worst crashes even at a 4% withdrawal rate. Here is the link: https://awealthofcommonsense.com/2019/04/what-if-you-retire-at-a-stock-market-peak-2/
I do not for a moment believe that 4% is necessarly safe. Some analysts suggest 3.5% for an internationally diversified balanced portfolio. Right now, I suspect we have more serious things to worry. Keep on writing Dale.