The “smart money” seems to be sounding alarm bells about the equity markets. Big movers like Bill Gross of Janus Capital Group; Bruce Cooper, the CIO of TD Bank; and others, like the Institute for International Finance, are predicting an imminent end to the bull market in equities. Is it time to sell stocks?
Not necessarily. First of all, don’t panic! It’s true that lately we’ve seen news stories reporting on what this or that guru or well-known portfolio manager is supposedly doing. The business media love “big” stories with extravagant claims.
It’s a sure-fire way to get eyeballs to websites. This is especially true during periods of uncertainty, as we’re seeing now, when stock markets have been in an extended bull cycle, when interest rates are poised to rise from historic lows, yet the economic outlook remains uncertain.
Remember that big money managers have their own agendas, and they will never ever reveal the whole story or their entire motivation for what they are doing. They manage billions and billions of dollars, and they’re very, very careful about the information they release to the public.
Before selling your equity holdings, it’s best, first of all, to take a step back and ask yourself why you really want to sell. What has changed in your asset allocation or your portfolio holdings, or your risk tolerance level that would cause you to take such a drastic step?
Before you do anything, review your financial plan and revisit your investment objectives to ensure your investment portfolio is still in line with your goals. If it is, then you shouldn’t really have to do anything at all.
Panic Selling Leads to More Doubt and Fear
In periods of volatility and economic uncertainty, it may be difficult emotionally to stick to your plan and stay invested. But remember, panic selling will only leave you with more doubt and fear—doubt that you’ve done the right thing when markets rally (and they will), and fear that you’ll lose out on the biggest gains, which typically occur early in a rally.
Buying and selling when markets gyrate only incur extra trading costs, create possible tax issues, and dampen your overall longer-term returns.
Instead of committing your portfolio to assets based on what you’ve heard or read in the news on any given day, it’s far more prudent to accept the reality of financial markets (they fluctuate unpredictably) and allocate assets in a way that aligns with your real tolerance for risk.
So, for example, with a moderate risk tolerance, your portfolio would likely be weighted 60 percent equity and 40 percent fixed income. The equity component is designed to generate growth (and perhaps some dividend income); the fixed income component is designed for safety and a regular income stream.
A Moderate-Risk Approach
If you are looking to make your portfolio more defensive against the possibility of a stock market correction, you can deploy two strategies. First, in the fixed-income component, look to a strategy using fixed-income funds that have a common goal of generating steady income while maintaining safety of principal.
This can be achieved by investing in Canadian bond funds (I recommend only short-term funds, given the current state of the market), high-yield bond funds (investment grade only), Canadian mortgage bond funds, or Canadian income trust funds.
To bolster income though the equity component of your portfolio, look to Canadian dividend equity income funds and real estate investment trust funds, which are also inherently defensive equity assets. I’d focus on low-MER (management expense ratio) passive, exchange-traded funds to keep overall costs down.
Focus on the Long Term
If you are a self-directed investor, you will need to keep your wits about you and stay focused on the long term. Investing is a lifelong process, and if you were to sell every time the markets corrected, the chances of getting back in just before a rally, recovery, or bull market are slim.
Investing takes knowledge and patience. Be calm, stay educated, and make decisions only when you have weighed the pros and cons and are ready to be accountable for the outcome. If you are not sure you are holding the right asset mix and feel that you are overexposed to equities, consult a qualified adviser.