Weathering the Pesky Stock Markets
Weathering the Pesky Stock Markets
By Adrian Mastracci, Portfolio Manager, KCM Wealth Management Inc.
I’ve found a new meaning for the catch phrase “If you don’t like the weather now, wait a few minutes.” It has surprising application to investing in the markets.
My family and I recently spent a few glorious days at a ranch. The drive got off to a cool-ish start, then a heavy downpour, followed by hot sunshine, then back to rain and more dark clouds. We arrived only to find that the much-anticipated hayride was postponed a day due to rain.
To the weather’s credit, it changed for the better quite quickly. Days were filled with superb hot sun, windy spurts, fast downpours, overcast skies, early morning fog, refreshing swims and lazy horse rides. The weather changes were sufficiently frequent that I waited only a few minutes between each one.
The ever-changing weather chronicles reminded me of their striking similarities to stock market gyrations. Investor optimism rises, then moments of gloom take over, then back again, perhaps interspersed with a touch of the sideways step. Markets mimic a roller coaster, regardless of whether you’re bullish or bearish.
Every analyst has opinions as to where the markets are headed. However, savvy investors know that trying to outsmart the markets is futile. If you are not thrilled with today’s markets, wait a while and something will change. Just like the weather roller coaster that unfolded during the ranch trip.
Market insights
These insights help improve your experience with the ever changing markets:
- Breathe deeply and keep your finger off the panic button. Markets are in control, not you.
- Like the weather, markets are very hard to predict. Listen to what they’re trying to tell you and don’t fight them.
- Unforeseen market events will repeat over and over in both directions. Be extra patient, particularly when you’re least prepared.
- Adopt contrarian investing ways. Sell a little as markets advance and buy some quality selections as markets retreat.
Mr. Longfellow was right about the rain. A similar argument can easily be made for the markets. Like it or not, the markets are going to follow their own dance card. You have to find avenues to endure the potholes, curves and sudden changes along the way.
Such market behaviour is a normal experience, so keep a keen eye on weathering the pesky markets. The wall of worry latches onto various markets, but don’t just fret needlessly. Worrying about market gyrations does not improve your investing. Look upon volatility as part of the ongoing journey.
Possible headwinds
Some possible investing headwinds include more squabbling about the U.S. debt ceiling and wrangling over the U.S. budget. Not to mention the ongoing debate as to when the U.S. Fed tapering begins and what’s going to happen to those interest rates. Excessive portfolio risk is sprouting up everywhere. Hopefully, positive data releases, like jobs, steady the economic outlook.
These strategies help shape your investing roadmap:
- Stay disciplined regardless of market volatility. The right investment mix helps deal with the roller coaster.
- Forget about timing the markets. Design and maintain your fitting asset allocation and be an investor, not a speculator.
- Monitor your total portfolio two to four times per year. It’s never too late to revisit and tweak the nest egg.
- Perhaps invest a set amount on a regular basis, say quarterly. Then rebalance occasionally after your allocations drift.
- Investors are typically comfortable with 40 to 60 percent in equities. The rest is allocated to a variety of fixed income and cash accounts.
Market risk history will soon be written again. Investing will carry on regardless of the outcome. My sage advice is don’t get rattled by the constant volatility. It’s much wiser to embrace it and stay disciplined to your personal roadmap.
Your retirement projection
Another area that helps put volatile markets in perspective is to create your up-to-date retirement projection. Knowing where you are headed helps invest your precious nest egg during uncertain times. Periodic surveys continue to suggest that investors are not totally prepared for retirement. However, that is a glass half-empty. Investors need at least a glass half-full.
Very few investors have a current retirement projection on hand. So, let’s delve into creating and estimating a sample projection.
First, the basic family assumptions. Say you want pre-tax retirement income of $150,000 per year, starting at age 65. Life expectancy is taken to age 90 for both spouses and inflation rises at 2.5% per year. Investing return is five percent per year after fees and the family receives 75 percent (about $28,000) of the total CPP/OAS government benefits.
I ignore all inheritance possibilities and there is no employer pension. No bequests are left to your beneficiaries as the base scenario. The value of the family home is not counted as part of the capital needs. Required returns can typically be delivered by a balanced investment plan.
The family will need capital near $3,000,000 to provide the balance of retirement income. This ballpark also assumes no large portfolio losses, nor high health costs during retirement.
The retirement capital pool is typically an assortment of RRSPs, RRIFs, TFSAs, taxable accounts, pensions, income real estate and businesses. One key is to ignore the doom and gloom that surrounds the retirement process.
Start focusing on your family’s retirement projection, at least 10 to 15 years before retiring. Use that ballpark figure to calculate how much you need to save and the investing returns to reach your goal.
Tweak your asset mix as required to match comfortable investing returns. Make sure that your highest earning years contribute effectively to your quest. Your retirement goals can be achieved and maintained with some focused planning. A periodic update of your retirement projection helps the roadmap.
Deal with losses
My experience shows that successful investors have learned to deal with losses. They know when to fold, and move swiftly and without regrets. Nobody likes to lose money. When an investment heads south, it often feels like catching a falling knife.
Making portfolio selections is not about always being right. One skill of investing includes coming to grips with the prospects of being wrong. We all experience this. It’s important to admit being wrong about the initial investment analysis and equally important to do something about it. However, the “doing something” part is the hardest step.
Let’s illustrate the pain of incurring losses:
| If you lose this much | You need this much gain to break even |
| 10% | 11% |
| 20% | 25% |
| 30% | 43% |
| 40% | 67% |
| 50% | 100% |
| 60% | 150% |
| 70% | 233% |
| 80% | 400% |
| 90% | 900% |
| 100% | It’s broken! |
Incurring losses is also part of the normal investing cycle. The challenging step is to curb the flow of losses from disappointing investments sooner than later. When the investment strategy stops working, act like a professional, take the loss and move forward. This applies even more to portfolios whose core holdings are individual stocks.
Another concern is allocating more than five percent of total portfolio to one stock, especially the employer’s stock. The devastating impact of incurring losses, especially unchecked losses, cannot be understated. It’s normal for investors to hope that losses magically reverse themselves quickly. Years of patience may be required, if a turnaround happens at all.
What is most detrimental to portfolios is not incurring losses. Rather, it’s keeping them far too long. Astute portfolio managers have the nerve to admit being wrong. Note that being wrong does not make one a bad manager. Staying too long with the loss is the biggest dilemma.
This approach reduces the impact of losses. First off, don’t get emotionally attached to any investments. Expect some investments to result in losses. One simple step is to establish personal thresholds for losses, say 20, 30, and 40 percent. Then, cut the loss and sell one-third of your investment each time the personal loss threshold is reached. Lastly, don’t second-guess the investment decision to cut the loss.
Investing is a game of probability. Yes, one can bail out too early on a loss position. However, if the investment fundamentals change, take the loss and move on. Each loss starts out as a small loss. It is less painful to bail out, rather than to insist that the investor is right and then bail out later with bigger losses.
Invest like a professional. That first loss is your best loss. The medicine is awful, but the payoff is that long-term investment success improves. Know when to fold. Cutting the losses early inflicts fewer damages on your portfolio.
Outlook revisited
Recent headlines should drive every investor to revisit the investing outlook. The prospects of Fed tapering and ongoing debt ceilings continue to play havoc. Many situations have recently surfaced to make investors worry more. These items come to mind:
- The global economy is healing rather slowly. More income growth is required to support the U.S. economy.
- Market volatility is likely to continue higher. Interest rates are expected to rise from current levels.
- China’s GDP growth could slip this year. The Eurozone is still limping from political tensions and bailout strains.
- Soft U.S. consumer spending may prevail longer than desired. Lacklustre data releases add bigger clouds to investment decision making.
So, how does an investor deal with the portfolio? First off, don’t be afraid to buy equities. Buy the dips and over time as ways to average in and rebalance. Add some international equities, particularly those that pay dividends. Fixed income is boring, but do include it in the mix. Finally, make sure the fixed income has quality and short maturities.
Keep this big picture in mind:
- Today’s economic outlook is better than last year, but we have a ways to go.
- Expect sluggish growth for the next couple of years.
- Remember that long-term stock prices are driven by fundamentals.
- Broad diversification is your best medicine to survive market jitters.
Do yourself a favour and revisit your total interaction with the pesky markets. Some simple tweaks can improve your portfolio progress.
