It has been a bumpy ride so far this year, but the global economy and markets are capable of coping. The Russia-Ukraine conflict is concerning and continues to affect investor sentiment in the short-term. More rate hikes are coming to combat inflation, which will likely stay high in Q2, but should cool later in the year as the effects of the pandemic fade. After the record-breaking returns of 2021, it’s inevitable the pace of growth will slow in 2022. Household savings, consumer demand and wage growth remain healthy.
On May 11th, Rob Carrick – The Globe & Mail’s most recognizable voice on personal finance – wrote an article (behind a paywall) titled “A five-step plan for dealing with the sad fact that almost every investment is falling lately”.
These are prudent, wise, and time-tested strategies that an investor should use to manage risk in a portfolio.
The 5 steps are:
First, get your down payment savings out of equities (stocks) and fixed income (bonds). In broader terms, do not invest money you intend on spending in the short-term. Save the equity and fixed-income funds for objectives that stretch out five to ten years into the future, such as retirement.
Second, whether retirees or pre-retiree: ensure you have enough safe, liquid money to fund two- or three-year’s worth of income. This strategy is like step 1: separate your short- and long-term funds and keep the short-term money safe. Most retirement portfolios should have a safer “cash-wedge” sleeve to service income payments.
Third, consider using GICs to supplement fixed-income in the non-equity portion of your portfolio. What is unique about this year’s market is that both equities and fixed-income have declined. Traditionally, fixed-income like government bonds correlate negatively with equities and insulate portfolios during a stock market correction. This has not been the case due to aggressive central bank increases. Fixed-income will rise again after interest rates peak.
Fourth, accept that the time for “theme, dream, and meme” investing is done for now. In the early stage of a market cycle, speculative assets often outperform safer ones. As the cycle progresses, larger-cap equities start outperforming. “Upgrading” your equities is a common way of mitigating against downside or correction.
Fifth, make a list of equities you want to buy on the decline and feed money in when markets have a bad day. Again, “buying the dip”, or “dollar-cost averaging” strategies are as old as markets themselves but are powerful tools available to the growth-oriented investor who is still adding to their portfolio.
Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term financial goals. This strategy helps you keep your emotions out of investing, typically buying high and selling low like many investors do. Ongoing monitoring and reviewing of your portfolio also ensures it remains on track.
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