How do you respond?
The things you should be doing when you hear that the markets have crashed.
Let's look at the past and see. Where do we start?, Well, let's look at the metrics of the most recent market crash and see if we can't find some similar market events in the past., Since 1956, there have been 7 market crashes., Suez Crisis (Jul '56 to Dec '57), OPEC Oil Shock (Oct '73 to Sept '74), Savings & Loan (Nov '80 to Jun '82), Black Monday (Jul '87 to Nov '87), Russian Ruble (Apr '98 to Aug '98), Tech Bubble (Aug '00 to Sept '02), 25 months for the Canadian market to drop 45%, 1 year return from market bottom = 20%, Financial Crisis (May '08 to Feb '09), 11 months for the Canadian market to drop 45%, 3 month return from market bottom = 28%, Average 6 month gain after the market bottom = 20%, Average 12 month gain after market bottom = 33%, So, what are the options?, 1. Understand the opportunity - invest an additional sum of money (eg: $10,000), 2. Remain invested - start a monthly contribution (eg: $100/mth), 3. Do nothing - hold what you've got., 4. Take a defensive stance - sell the position, invest in cash for a year and re-enter the market., For those of you who know me, you've probably heard me say this before., Don't let emotions dictate your investment decisions. Focus on the logic., Here's what I mean., Which of the options I just listed feels the safest?, Sell the position, invest in cash and then re-enter when things settle down., Which option feels the riskiest?, Invest another lump sum into the market and hold what you've got., Let's look at the results in terms of how long it took to recover your original investment., If we look at the Credit Crisis from June 1981 to June 1982, the Canadian Market dropped 39% over that time., Option 1 - Invest an additional lump sum., 3 months to recover original investment, Option 2 - Remain invested, start a monthly contribution., 7 months to recover original investment, Option 3 - Do nothing, hold what you've got., 10 months to recover original investment, Option 4 - Hit the sidelines., 55 months to recover original investment, In every case, the next ten years has generated over a 100% return.
1. Don't panic!, The only reason why people panic is because they are afraid of the unknown., If you knew what was causing a market event, you could better assess what you needed to do and how to respond., Knowing the historical data should help.
2. Don't talk to your friends., People will only tell you their successes - brag., They don't know your situation like a CFP would.
3. Don't sell to "stop the bleeding".
4. Obtain information from your advisor as to why the markets are reacting the way that they are., See our Fly On The Wall Investment Update Calls.
1. Educate yourself., The Fly On The Wall Webinar., www.keytoretirement.ca
2. Ensure you are investing in an Active management style. This allows your portfolio managers to take advantage of the market volatility., Mutual funds and ETFs alone do not provide this., You must align yourself with a discretionary investment firm who can oversee your portfolio strategy and position your portfolio on your behalf to take advantage of any opportunities that present themselves.
3. Consider tax-loss selling., Trigger the paper loss today, re-invest in another version of your current portfolio (thus allowing you to avoid the superficial loss rule in Canada) and carry back the tax-loss generated to one of the three previous years to offset any tax paid on any capital gains realized., Carry forward the tax loss to a future year to help offset any gains generated., December is a busy month for me because I review portfolios to see if there are any tax-loss opportunities to take advantage of.
4. If your paperboy qualifies to invest in the same investments you are in, consider migrating your portfolio to a more appropriate investment solution that is better suited and priced for your level of investment account., Thresholds:, < $100,000 - Mutual funds., $100 - $500,000 - Managed accounts, $500,000 + (Investment Counselor / Portfolio Manager
5. Re-calibrate your financial plan, Assumes you have a plan., If not, this should be step 1 - before anything else.
You log on to www.mint.com and register your free account., Then, gather your login information for all of the online accounts you have. Things like your personal banking user name and password, mortgage login details. Basically, if you can login online to check your account balance for one of your accounts - asset or liability - gather it together., It uses bank level security. No one can move any money using mint and, its' 24/7 monitoring will notify you of any large transactions or changes made to your account., Then, add your accounts and let mint consolidate your information into one, streamlined, easy-to-understand place. And, it's smart enough to know your trip to Tim Horton's, should be categorized as a coffee shop expense!, It does this for all the transactions that take place in your accounts., You don't need to update mint. It updates itself., You can log in to your mint account using your computer, iPhone, iPad or Android smartphone., You'll be amazed at how much analysis you can do on your spending habits, how you can track whether you're moving closer to or further from your financial goals., And, isn't this what you wanted in the first place?, So go now to www.mint.com (or check out the links in our show notes for this show (episode 08) and try it out. It's totally free.