Severe market corrections cause many investors to question their long term strategic investment plans. ‘Buy low; Sell high’ is a popular, but not very helpful, investment strategy. Better you should ‘Buy on weakness; Think twice before selling now’. Here are some questions to ask yourself before you press the sell button.
The Canadian stock market has corrected since it reached a 2015 high of 15,451 in mid-April. The S&P/TSX Composite Index is now down just over 10 per cent since then. The decline can be attributed to a number of factors. But a tumbling stock market in China, as well as a decrease in Chinese demand for natural resources, has had a decisive impact on the performance of Canadian stocks lately.
It’s at times like these that nervous investors begin to think about overriding their strategic investment objectives and selling their investments. If you’re one of them, and you’re thinking of selling your stake in a good-quality mutual fund or stock, ask yourself these questions before you do sell.
■ Is it the market or your security that has you thinking of selling? No stock or equity fund is immune to market corrections, but high-quality securities with a history of low volatility should fall less than others in a decline. You should only sell such securities if there is some material change that may affect their long-term future performance. Otherwise, use market setbacks as an opportunity to buy more securities at lower prices. In other words, build on your long term investment strategy. Don’t abandon it now.
■ Will your returns be high enough to offset commissions and fees? The more you trade, the more likely it is that more money will go to your broker or investment adviser, and not to you. Trading also increases the pressure on you to find another stock or fund that will do as well as the one you just sold
■ What are the tax implications of selling now? While not of paramount importance, taxes should be considered when you’re thinking of selling. That’s because 50 per cent of your capital gains are taxable outside registered plans.
On balance, then, we think you’re better off thinking of buying rather than selling in a falling market. Review the objectives of your long term strategic investment plan. Just be sure to spread your purchases out over time.
Buy on weakness
Buying stocks when prices fall can be a nerve-racking experience. If you understand the reason for falling prices, however, you should be able to invest strategically with more confidence. Stock prices generally fall for two reasons: one is technical; the other is fundamental.
Stocks fall for technical reasons, for example, when their prices rise faster than their earnings. But stocks also fall for fundamental reasons, such as a slowdown in economic growth or deteriorating profits. When these things happen, you might wish to be cautious.
But despite recent concerns about global growth, particularly in China, there’s no clear-cut argument to be made for a major pullback in the global economy. Indeed, we think that while the global economy is likely to disappoint investors again in 2015, there’s a case to be made for a gradual rebound in 2016, as the developed economies gain momentum.
But while there’s a fundamental case to be made for continued investment right now, most investors may be better off if they take a straightforward approach to investing and give up on trying to buy at the bottom and sell at the top. Instead, single out a balanced and diversified selection of equity securities that you feel are worth buying and holding on to for the foreseeable future. Buy them during your working years (gradually, so you buy more shares when prices are low and fewer when they’re high). Finally, do most of your selling in retirement.
Money Reporter, MPL Communications Inc.
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