This has been an ugly year for the stock markets. During the close of trading on Friday, the S&P 500 is down 15.73 percent since the calendar shifts to 2022, and the S&P/TSX Composite is down 5.44 percent.
Markets don’t always go up, but given that most Canadians need to invest in these two indicators to achieve their retirement goals, who wouldn’t be affected?
This is definitely not the time to sell stocks that have already fallen. The winning plan is to buy low and sell high.
A weak market is often a good opportunity to assess how well your portfolio is equipped to handle bad times.
Here are a few things to keep in mind if you dare to have a purse bowel examination. You can do this on your own, but a qualified counselor can provide better insight and an assessment with less emotional concern.
Do you own the right stocks?
Legendary value investor Warren Buffett compares selling in the market to meager dipping. When the tide goes out, he says, you can see who’s swimming naked.
Like the stock markets, the tide affects everyone – some more than others. The stocks least affected tend to be the best; Those with good budgets and steady profits.
They also tend to be the stocks that recover first and hit new highs once the market catches them.
If you already own it, it may be a good chance to own more.
Does it pass the diversification test?
A good portfolio should always be diversified across sectors and geographical lines to reduce losses confined to one sector and maintain exposure to the strongest performers.
Technology stocks, for example, have taken a big hit this year; Meanwhile, energy stocks were among the stars. This time last year, their performance was the opposite. At the time, technological gains mitigated energy losses. Now the energy gains must mitigate the technology losses.
If your diversification strategy works, your portfolio losses should be less than the broader criteria.
Is my portfolio generating a reliable income?
This year’s market losses should also be mitigated by income-generating investments in your portfolio.
Low yields, caused by low interest rates over the past two decades, have rendered fixed income invalid. However, a one-percent gain can help lift an entire portfolio from a 20-percent loss.
With rising interest rates, yields from secure fixed income such as government bonds, guaranteed investment certificates (GICs) and investment grade corporate bonds are becoming more and more attractive. Shifting the weight of your portfolio from stocks to bonds over the longer term will make future market turmoil less stressful.
Your fixed income strategy should be part of a broader income strategy to generate reliable cash flow near or in retirement. This strategy will include dividends from stocks, which are not as reliable as fixed income because the payments are subject to the discretion of the company and the whims of the market.
Stocks that fit the above description can include stocks with strong and reliable dividends. Examples include real estate investment trusts (REITs), Canadian telecom companies (one such company is BCE Inc. which owns BNN Bloomberg through its media division) and major Canadian banks. They tend to be staples in Canadian retirement portfolios – either directly or through exchange-traded funds. Banks this week got a lot of attention.
John Aiken, head of research at Barclays Bank of Canada, told clients to expect “bonanza” earnings from banks in their upcoming earnings season.
He also noted that bank stocks are cheap compared to earnings in the historical context, which would put them in the “buy low” category.
put another way; With the market out, Canadian banks are wearing swimwear.
Payback Time is a weekly column written by personal financial columnist Dale Jackson on how to prepare your money for retirement. Do you have a question you want answered? Send an email to email@example.com.