The 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.
(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.
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?by