Dear Stock Market: You’ve Ruined Thanksgiving!

thanksgiving turkey burntThe Canadian Thanksgiving was last weekend and as I was stuffing my face and giving thanks for the many blessings in my life, the furthest worry from my mind was the recent plunge in the stock markets. The TSX composite index decreased over 4% in September 2014 and has continued to slide throughout the month of October.tsx oct 2014

(Source Globe and Mail)

When it comes to passive investing there are two types of investors – those with time, and those without time. When I say those with time, I’m referring to individuals that currently do not need to cash in their investments to live and will continue to make contributions to their savings. Conversely, those without time are those that are consistently cashing in their investments to support themselves (retirees).

The reason I’m not sweating the latest stock market decreases is I have lots of time. Not only am I not sweating it, as someone who is relatively in the early stages as an investor, I’m all hot’n’bothered by it! I can now purchase stock at a discount compared to the value of the market over the last five months.

This doesn’t mean I’ll take out a loan or make a huge lump sum contribution to my investments right now because the markets could continue to slide. It means that I’ll continue my investment strategy of consistently contributing to my nest egg knowing that eventually the markets will rebound, and because I continued to purchase investments, I’ll be better off.

“You can’t retire…you’re too…old!”youre too old

For those without time a decrease in the market can be a lot more painful. To combat the potential volatility in equity stocks (which the TSX composite tracks) a good mix of fixed income (bonds) should be the staple of your investment portfolio – as high as 50% or higher of the total portfolio. Bonds can be in the form of corporate bonds to businesses or government bonds that typically hold their value regardless of the swings in the market. While fixed income typically offers less promising yields because of their safety, an individual who relies on investment income for their livelihood shouldn’t be taking substantial risk in equities.

During the Great Recession a few years back those who were heavily invested in equities lost up to 50% or more of their portfolio. The market eventually fully recovered, but those who needed to cash out some investments to survive took a big. In situations such as this delaying retirement an extra year or two can have a huge impact on your long term portfolio.

To my fellow 20 and 30-somethings; what’s your take on the decrease in the market? Do you care? Does this alter your investment strategy? To the soon to be retirees; does this latest downturn affect your outlook on retirement?

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  1. First of all I want to applaud your use of Globe and Mail charting. We’ll done sir.

    Market pullback has been coming for a while and if you try and time it you end up worse off than just riding it out So let’s ride it out…..unless you’ve got a can’t miss tip on which case I’ll take my rrsp for a ride!

    • Jonny

      I pick up the Globe and Mail every Saturday morning!
      I felt like a genius these past few years of market gains – now I guess it’s time to get serious about your investment strategy and stick to it!

  2. This is currently a very painful topic for me to discuss, and I am developing neck pain from cringing every morning when I check my accounts. :-p

    I understand that my goals are long-term, and this dip shouldn’t bother me. The unfortunate reality is that understanding, and how you feel about something, don’t always line up. The truth is it does stress me out to see the headway I’ve been making go down day by day.

    In terms of changes to my plans? The only real consideration I’m thinking about is whether I should take a gamble and throw a few Ks into my investments during the lull, and see if it pays off in the long run. Otherwise I will just grit my teeth and carry on.

  3. You’ve hit it bang on again Jon…no need for reaction to short-term market fluctuations by changing your strategy. A key is determining the strategy upfront and only changing at predetermined “reflection” dates (say once a year on September 1st), this takes the emotion out of it which typically is not your friend. So you just go on with your dollar cost averaging!!

    Something worth noting for “those with time” broad market index investors, is the disproportionate impact of the market performance the last 5-10 years before retirement. While true that long duration allows investors to wait out market downturns, if the markets take a dive in the period right before retirement, it can really hurt. Said another way, an investor retiring in 2009, just after the market crash, could have done everything right (broad based diversified portfolio) for their entire working career but come up short on their retirement savings plan because they were simply unlucky with their retirement date. Of course this could be partially/fully dealt with by “up-ing” the fixed income allocation as retirement nears (changing ones strategy each Sept 1st in my example for changing circumstances).

  4. This pullback is a bit of a relief – I thought it would come sooner but glad that some of the air is being taken out. It does sting a bit but not selling anything. People that are making regular investments (or reinvesting dividends) are enjoying the benefits of dollar cost averaging right now. I plan to buy more, just not right yet.

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