Stocks are Falling: Buy, Buy, Buy!

Oh I love to see these sudden market drops! There really are no words for the feeling of joyful glee with which I rush to put in my orders. Buy! Buy! Buy! TD is on sale! BMO is reduced! BCE is at a discount! ENB is marked down! Time to dig the annual RRSP and TFSA money out from under the mattress, dust it off, and spend, spend, spend!

Photo of Indigo Bunting Bet Crooks

How to Deal with Markets that Just Keep Falling

The trick is once you buy DON’T look at the market for a few days. You should pick a price you think is reasonable to pay, buy if you get a chance at that price, and then get back to work making money in other ways that don’t involve the stock market.

The market may well continue to plummet AFTER you fork over your hard won cash. It’s kind of sad to realize you could have bought at an even lower price. So don’t look! Once you’ve invested, it’s done. Go away and let the market bubble along without you.

Best of all, get outside and do something real. Play softball. Take a bike ride. Wing a Frisbee for a dog. Swim across a bay. Not only will all those things remind you that money is abstract and you could actually live reasonably well with less of it, these activities will also improve your health. If you drop dead from inactivity caused by staring at your computer screen all day, every day, what good was saving and investing?

Even if Market Values Collapse Often Dividends Don’t

You’ll notice that the stocks I’m chanting about are all blue chip, large cap Canadian stocks. They’re companies I would feel comfortable holding for 3-10 years or longer providing they don’t get into any significant shenanigans during that term. I’m not buying them expecting to make a killing of a capital gain. On the contrary I’m buying them primarily as income stocks. They pay a steady comfortable dividend of between 4-6% at these discounted prices. That’s what I’m primarily after. If there is a long-term capital gain: bonus!

Don’t Invest Everything in Stocks

Everyone says this. I’m one of the few that does this. I don’t have all of our money in stocks. In fact, I don’t even have most of our money in stocks. We sleep well through all the market gyrations because we have investments that are not in the market at all.
I recommend the same.

Have a sturdy solid base of money that is not in the market. Yes, it is not earning much interest. Yes, it may be losing value against inflation. Tough, isn’t it? I figure I can earn enough off the portion that is in the market to cover inflation. If I’m wrong, I’ll just have to cry myself to sleep as I live off my 6-figure cash assets. Something tells me I’ll survive. I actually like beans.

Investing Can Be Fun!

Take some joy in your investments. Everyone seems so depressed all the time. Why? It’s only money! Ask anyone in a palliative care facility if they wish they had agonized more over every financial decision. I guarantee they will look at you blankly. Make the best investment decision you can for today, then get out there and Live! Love! Prosper! Those Vulcans know a thing or two.

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Are you enjoying the current market swoop? Have you taken a refreshing plunge into the market and risen up from the swirling wild waters with a pearl? Please share your experiences with a comment.

How Can I Buy an Annuity Without Giving Away my Principal?

Annuities can provide a steady reliable source of income for someone who is not working perhaps due to retirement. Basically, you buy an annuity and it pays you a set amount on an agreed schedule for an agreed length of time. When that time is up, the original principal invested stays with the annuity’s issuer. Often the length of time is until the buyer dies. But what if you want the steady reliable payments but you don’t want to permanently hand over your principal? Is there some way to buy that?

A Reasonable Facsimile for an Annuity

So far I haven’t found any product that is the same as an annuity but that doesn’t use up your principal. I have found what advertisers used to call a “reasonable facsimile” though. It looks a bit like an annuity and works a bit like an annuity but it isn’t one.

For this to Work You Should Act as if You’re Buying a Vacation

If you’d asked me ten years ago if I had any stocks I would have said no. Then, after thinking for two or three minutes I might have corrected myself and said “well actually yes I do. But not real stocks.”

My confusion would have stemmed from the way I acquired those two stocks. Many, many, many years ago, I bought stock in my employer when it was privatized. As a then resident of Alberta, I also bought a small amount of Alberta Government Telephones when it privatized. (You may know it better by its current incarnation “Telus.”) In both cases when I bought the stocks I never expected to sell them again. They were impulse buys and I thought of them the same as if I had spent money on a vacation. It seemed like a good way to spend the money at the time and I’ve never thought much about it ever since.

If you are seriously interested in this “facsimile” of an annuity, you’d have to do the same thing. You’d have to consider the money you spent as being “almost” as gone as if you’d bought a true annuity. You’d have to go in with the possibility that you might never see or touch that money again.

You’d Also Have to Be Prepared for a Possible Drop or End to your Payments

If you buy an annuity from a well-respected source, part of the payment is insured. If the company issuing the annuity goes bankrupt you’re guaranteed to get at least a portion of your regular payments.

If you buy an annuity from a fly-by-night source, however, you might lose the whole thing if the issuer goes bankrupt.

Some people still choose this second option, especially if the proposed annuity payment is much higher than a well-insured one.

If you’re going to buy into this “facsimile” annuity you’d also have to be prepared that the payments could drop or could stop. How likely it is for the payments to be at risk depends on from which issuer you choose to buy your payments.

Have You Guessed the Nature of the Facsimile Annuity Yet?

Yes, the reasonable facsimile is a collection of dividend paying stocks.

Your principal might be recoverable unlike with a true annuity because you might be able to sell your stocks to get back all or part of your principal.

Your payments would not be guaranteed to stay the same or to continue because some companies do cut their dividend payments and some do stop paying dividends.

The risk of a dividend being cut or stopped can be estimated for a stock if you look at its dividend history and its current and announced company plans. Some companies are well aware that their investor-base is people who need steady, reliable income. If their business plan tends to produce steady reliable profits they usually plan on maintaining their historical approach to paying dividends.

Why I Forgot I Own Two Stocks

This brings me back to the two stocks I owned and actually forgot about. One of the stocks plummeted to half its value within a couple of years of when I bought it. From that point forward, I never included it in any estimates of my net worth. The other was such a small amount of stock it would be like counting the contents of my childhood piggy bank.

While I forgot about these stocks as “investments” or “capital gains plays” I never forgot they pay dividends. In fact, out of curiousity I recently worked out the yield for these stocks based on what I paid to acquire them all those years ago. (I didn’t factor in inflation or the lost time-value of that money. I kept it simple and just divided how much I get per year now by how much I paid in cash back then. This is not good math. It was just fun.)

The shares are now yielding 8% and 18% per year on their initial investment. That’s substantially better than the current yield for someone buying the same stocks today. Which is good because the increase is supposed to help cover some of the rate of inflation. (In fact when I compared it against the CPI increases for those years, the increase has been higher than inflation.)

Both stocks have also enjoyed large capital gains over the years. But since I have never sold the stocks and since I act like the money I paid for them is long gone, that’s not actually relevant. If I’m still holding them when I die, though, my survivors may be pleased. They could donate some of the shares to charity and use the tax credit to help offset some income taxes on the rest of my estate.

How Can I Pick the Stocks to Buy for my Facsimile Annuity?

Ah, now there’s a difficult question. I’ll have to get back to you on that with another post. In general, though, you’d be looking for a stock that has

  • paid a dividend for many years without interruption
  • is a business that tends to have a steady profit, such as a utility, financial or telecomm business
  • preferably has increased the dividend steadily to keep up somewhat with inflation
  • does not jeopardize its own survival just to pay a large dividend

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