Coping With COVID-19 Investment Stress.
The COVID-19 crisis may be giving you an uneasy feeling when you check your investment portfolio. Or perhaps you’re simply avoiding market news altogether. Here’s how to reduce anxiety and make sure you have the knowledge you need to move forward with greater confidence.
If you’re like many people, you’ve found it hard to tear yourself away from the news these days, as the COVID-19 pandemic continues to spread.
It’s understandable: beyond the high human and social cost of the virus, as of this writing, we’ve seen tremendous volatility in the markets, with the TSX making a major rally on Tuesday, Mar 24, rebounding from an 8-year low only the day before. The Dow Jones also had an historic rebound the same day rallying by over 11% after experiencing its worst point drop on record on March 16.
This volatility doesn’t just stem from COVID-19; it’s also being caused by a sudden oil-price war in the face of collapsing demand as factories are idled and thousands of flights cancelled around the globe. The International Energy Agency said that it expects demand will contract this year for the first time since the recession in 2009 that followed the global financial crisis.
To be sure, it’s difficult to log into your investment accounts and potentially see a significant drop in a single day. But a few shifts in your thinking can help ease some of your anxiety in this very difficult time.
Panic selling is usually a mistake
In times like this, the temptation to sell and preserve your nest egg can be overwhelming, particularly on days when the market is deep in the red.
Selling now would bring stability to your portfolio and, for a time, ease worries about future losses. But there are two problems with this approach: first, holding cash exposes your wealth to erosion from inflation, which was around 2.4% in Canada in January. Second, once you’ve left the market, it’s nearly impossible to predict when to re-enter because market bottoms only appear in hindsight.
Consider the 2008/09 financial crisis, which saw the TSX fall 44% on a price basis from July 18, 2008, until the market bottomed on March 9, 2009. If you were unlucky enough to sell your equities and convert to cash around the time of the market low, you would have missed out on at least some (if not all) of the gains the TSX has delivered since.
And then there are the nearly 11 years of missed dividend payments you would have missed out on, which can be significant if you hold high-yielding Canadian stocks, which regularly offer dividend yields of 4% and up. The role dividends play in the average equity investor’s long-term return is considerable: over the past 42 years, Canadian stocks’ regular dividend payouts have supplied about one-third of the TSX Composite Index’s total return.
Now is the time to reassess risk
Instead of giving in to panic selling, this is a good time to contact your advisor and do a careful risk appraisal of your portfolio to ensure your holdings line up with your age, risk tolerance and need for income. Your advisor will also work with you to make sure your investments are properly diversified.
But what if your risk assessment reveals that you’ve purchased an investment that you’re not comfortable holding onto it until the recovery kicks in?
In that case, you might consider selling it in the near future and reinvesting your money in an option that better suits your risk tolerance. That’s because the current volatility will likely remain for several months to come, and more market swings will certainly test your resolve.
Three strategies for a turbulent market
- Rebalancing: Here’s a scenario you might find yourself in today: suppose you hold a corporate bond that has fallen 40% to 50% in the last few weeks. If you decide you must sell, a smart move would be to wait for an upward move in that security’s specific market to do so. Then you can redeploy the cash into something more suitable for you.
- Dividends: In times of heightened volatility, income investments also serve another purpose: helping tide you over until the recovery eventually kicks in. Dividend payments, not including any dividend raises the fund may offer, could be used to pay bills or meet other needs, reducing your need to sell any shares at today’s low prices. If you decide to reinvest your dividends, the pullback means you’re automatically buying more shares now than you would have been able to a few months ago.
- TFSAs: Another way to maximize your dividends is to hold investments in a tax-free savings account (TFSA), which, as the name suggests, will let you take out any dividends (and gains) accrued in the account without paying tax on them. This year’s TFSA contribution limit is $6,000, but your annual room from past years carries forward. If you were 18 years of age or older when TFSAs were first introduced in 2009, your total contribution room (including your $6,000 of room for this year) is $69,500 in 2020.
Rates of return have never been linear
Finally, bear in mind that when it comes to the stock market, rates of return have never been linear: to average, say, a 6%+ yearly return on your equity investments over the long haul, you’ll get some years like 2019, when the TSX rose 19%, and some years like 2018, when the index dropped 12%. There will also be some really difficult years, like 2008, when the TSX fell 35%.
But over time, your yearly return averages out: for example, the TSX’s average return was 9.3% a year between 1960 and 2018, a period that saw a range of crises, like soaring inflation in the 1970s, the dot-com crash of the early 2000s and, of course, the 2008/09 financial crisis.
Talk to your advisor
No matter what your age or risk tolerance, periods of market turbulence are a good time to get in touch with your Credential Asset Management Inc. or Credential Securities advisor and make sure your portfolio is suited to your individual needs. That’s the best way to resolve worry and confidently move forward.