Riding out the storm
The stock markets are diving and no one can predict how deep this correction will be. So what investment strategies should you adopt now as we ride out this turmoil? Here some suggested dos and don’ts:
Do hold cash. In times such as this, cash is king. The return will be low, and will go lower as interest rates fall. But your capital is protected and having cash reserves enables you to move quickly when the time is right to buy.
Don’t bottom feed. Stocks in the sectors that have been hardest hit so far, such as U.S. financials and real estate, may look like screaming bargains right now. But they appeared to be good value a month ago and since then they have fallen even more. Remember what happened to investors who went shopping for high-tech stocks in mid-2000 after the first wave of the collapse had passed. Those stocks looked like bargains then. Most turned out to be dogs. There will be a time to buy these beaten-up issues, but it’s probably not here yet.
Do some selective shopping. While I don’t recommend buying U.S. financial and housing stocks yet, there are good values emerging among companies that appear to be relatively immune to an economic downturn. Just as a rising tide lifts all boats, a falling tide is having the opposite effect. For example, when the shares of Rogers Communications (TSX: RCI.B) fell to below $40, I began adding to my personal position. Rogers’s wireless growth may be slowed by an economic downturn but all those cable and cell phone subscribers aren’t going to vanish overnight. I’m not saying it has hit bottom but if the price drifts lower, I intend to keep building my position. I believe it will eventually pay off but check with your financial advisor before acting.
Don’t throw out the baby with the bathwater. In every market downturn, some investors reach a point where fear overwhelms common sense and they sell everything at any price. That happened most recently in November 2006 in the days immediately following the announcement that the government would tax income trusts. Those who blew all their trust units out the door in reaction have long since come to regret it. Don’t make the same mistake now.
Do own some bonds. I’ve said for years that bonds are the best line of defence against a stock market correction. That proved to be true in 2000-2002 and it is turning out the same way once again. As of the close of trading on Jan. 17, the DEX Universe Bond Index was up 1.08 per cent so far this year and the various government bond indexes were doing even better. By contrast, the S&P/TSX Composite was down 7.9 per cent. In the final six months of 2007, the average Canadian bond fund gained 3.3 per cent. The average Canadian equity fund lost almost 1 per cent.
If you are still not a bond believer, it’s time to wake up!
This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder member, click here.