Bull and bear markets succeed one another. But market timing just doesn’t work, so stay the course, invest gradually and rebalance your portfolio towards stocks.
The stock market’s unexpected plunge this year caused some investors to sell in a panic. We think that’s a mistake—provided your portfolio contains high-quality, dividend-growing stocks.
Why would you sell and guarantee yourself a loss while such stocks are on sale? You might plan to buy back in ‘at the right time’. But professional investors who spend their time looking for buying opportunities often get it wrong. Will you outsmart them? For instance, did you buy back before the impressive market rallies from March 24 through March 27?
As a result, you’re probably best off simply staying the course and continuing to gradually build your portfolio. Focus on the long run. The March 2020 issue of Advisor’s Edge magazine writes: “Just because the news is updated every minute doesn’t mean [investment] accounts have to keep up. Training clients to do nothing can be surpassingly difficult.” Billionaire Warren Buffett attributes part of his success to his ability to do nothing when news outlets are screaming at investors to do something.
Studies show that less trading is better
Advisor’s Edge presents the results of two studies that show that less activity is better. One was carried out by Craig Basinger, chief investment officer and portfolio manager and his colleagues at Richardson GMP. It “examined the cost of reacting to market weakness over the last 30 years. Investors who started with $10,000 in an all-equities account and held it would have had $150,000. Those who sold every time the market dropped 7.5% and sat in cash for six months would have had $86,000 at the end of the period.” What would you do with an extra $64,000?
A second study was carried out by the University of California in 2000, called Trading Is Hazardous To Your Wealth. The study examined data from 66,000 American households. Those that traded frequently earned average net returns of 11.4 per cent. Households that traded infrequently over the same period earned a much higher 18.5 per cent.
If you can’t relax and must do something, consider rebalancing your portfolio. With the drop in the stock market, you may find that your holdings of stocks are too low. In months past, we advised you to accumulate cash to pounce after a stock market setback. Use such cash reserves to buy high-quality dividend-growing stocks.
You may plan to make a contribution to an RRSP (Registered Retirement Savings Plan). In this case, move the money into high-quality dividend-growing stocks. You may also plan to contribute to a TFSA (Tax-Free Savings Account). As always, we urge you to first build an emergency fund. Then invest surplus cash into stocks.
How to control stock market volatility
The stock market’s considerable volatility so far in 2020, can paralyze some investors. Many fear making an investment just before another drop.
One way to control volatility is to gradually invest over time. Making smaller investments is easier on the nerves than making one big investment, of course.
Another plus is that you can control stock market volatility by what’s known as ‘dollar-cost averaging’. That is, invest fixed sums when prices turn out to be higher and you buy fewer shares. Invest fixed sums when prices turn out to be lower and you buy more shares. The end result is that you buy your stocks at a reasonable average price. This reduces your exposure to volatile stock markets.
This is an edited version of an article that was originally published for subscribers in the April 10, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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