crash | Financial Crooks

Mr. Trump won and whether you hoped he would or not, you likely know that the American and world stock markets are jittery wondering how many of his pre-election promises he intends to keep. Will he really tear up the NAFTA? If he’s building a wall, how much concrete will he need? Will world investors pull their money out of US corporations? Some traders who call themselves investors are wondering if they should sell off their equities now, keep the money in cash, and then buy back in after a significant world stock market drop.

Why Do Brokerages Love Uncertain Markets?

There’s someone who will definitely make money if you sell your holdings now and buy back in later: the brokerage. You’ll be paying a fee on each position you liquidate and paying another fee for each time you buy a new equity or ETF to get back in the game. They win on both plays.

“Churning” investments is always a source of income for brokerages. Brokers with their clients’ best interests at heart never buy or sell investments just to earn commissions. Unscrupulous financial advisors, however, won’t discourage and might even encourage customers to rack up extra commissions.

What Should I Do If I Don’t Know Which Way the Markets Will Go or When?

The truth is no one is always accurate predicting which way a stock market will move and when. Some people have better luck at it, which they almost always attribute to skill, but no one has a perfect record.

I would not sell shares of equities or ETFs just because the market MIGHT move down.

The Benefit of an Asset Allocation Plan That Designates Fixed Income and Equity Proportions

Instead of trying to guess about the markets, I prefer to use an old trusty technique: asset allocation.

I set an amount to hold in “safe” non-equity investments and an amount to hold in equity investments.

To make the amount useful, as I’m still saving money each year, I set it as a percentage of my total holdings. Because I am incredibly risk-averse, as discussed many times here, I have set it at 50/50 even though I have a long time till retirement.

I re-balance to stay within that 50/50 split on a regular basis.

How Does Setting a Percentage for Safe Fixed Income and Riskier Equity Investments Help Make Market Timing Decisions Easier?

Why does this strategy make my investing decisions easier?

Well, if the stock market falls suddenly, my % held in equities drops. For example, it might drop from 50% of my total monetary assets to 35%.

If it does, I then have too much in my “safe” fixed income investments. I now have 65% in cash, GICs, and bonds.

So I use some cash to buy more equities to get back up to 50%. If I can, I use my “new” investing money that I’m saving from my income. If I can’t, I use some of my fixed income cash or sell some bonds to get the cash I need.

Similarly, if the stock market bubbles up to all time highs, my percentage of equities might grow to 65% and my fixed income by comparison drop to 35%. If I don’t have enough “new” money to bring my fixed income back up to 50%, then I sell a bit of my equity holdings to return to a 50/50 split.

Does Keeping a Fixed Asset Allocation Help Avoid Buying High and Selling Low?

As you can see from my descriptions above, keeping my 50/50 split forces me to sell high (when my equities have grown too quickly for my fixed income to keep up) and to buy low (when my equities have fallen in value too low to match my fixed income.)

I don’t have to actually guess if it’s a “low” or “high” market. For ME the market is high or low and the decision is made.

Does This Strategy Work All the Time with 100% Optimization?

I have no idea! I just know it’s working for me, so far. I’ve read the theory in many investing books as well. So far I haven’t read anything that says it is a terrible idea.

If you are investing for a long-term goal (e.g. 15 years or more in the future) this is a strategy I would suggest you consider.

Won’t Another Strategy Work Better?

Decide for yourself whether an alternate strategy is more likely to out-perform this one. Don’t forget, though, to include the emotional factors and the cost of indecision of any potential strategy. For example, trying to randomly guess when to sell and when to buy back in is a difficult process. It tends to lead to emotional distress and second-guessing.

What Am I Doing Differently With Our Investments Now that President Trump Has Been Elected?

Nothing, yet. I’m not selling anything right now, and I will invest my new money into whichever asset class is out of whack with my allocation plan. If the markets tank, I will re-balance as best I can.

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Do you try to keep a certain split between fixed income (cash, GICs, bonds, possibly certain types of preferred shares) and equities? Does it help you decide when to buy and sell? Please share your views with a comment.

As soon as markets start to go up and stay up for a few months in a row, someone starts predicting that they will crash. And when the TSX and NYSE hit new “record highs” the buzz became almost deafening: Now a MAJOR market meltdown was inevitable–it was just a matter of when. But why? Why do people assume that markets reaching all time highs mean a crash is coming: if the stock market is supposed to return an 8% or higher average, doesn’t it mean it MUST set new records and fairly steadily?

Why Does Anyone Invest in the Stock Market?

Investing for Income

Some people invest in companies listed on the stock markets to get dividends and distributions. Their investment choices are driven by a need for income.

Not all companies offer dividends or distributions though. Why would people buy shares in those companies?

Investing for Capital Gains

Many other people are investing in companies’ stocks to try to win a capital gain. They want to pay $20 for a share and sell it to someone else for $40, or more. They are willing to buy shares that don’t pay anything to investors but which may be worth more in the future than they are now.

Obviously, sometimes these investors are unlucky. The perceived value of the company drops and if they sell their shares they realize a capital loss.

Shouldn’t the Stock Markets Indices, Over Time, Go Up?

If you go to a site like Yahoo Canada finance, or sign in to a brokerage website, you should be able to look at a graph of the S&P TSX Composite Index over several years. Go to https://ca.finance.yahoo.com/q/bc?s=^GSPTSE&t=my&l=on&z=l&q=l&c= and if necessary click on: Max

It should have jagged peaks up and sharp valleys down, but there should still be an overall trend in an upwards direction. Or at least there should be if you believe that investing in the stock market should yield you a capital gain, over time, if you invest a tiny bit in every company in that market index.

If you look at the last 10 years of the S&P TSX Composite, you will likely notice it spiked up to a nice point at about 14 000 in 2011 and it’s currently (in September 2014) at 15 000 and still climbing. In 2008 it also reached over 15 000. On January 1, 1985 it was under 3 000.

The overall trend from 1985 till now is up.

So why, just because we are finally trading in the 15 000 plus range, are people shouting it’s going to crash?

For people who had all of their money invested before May 2008, and who invested for capital gains not for dividends or distributions, it must seem like the party is just about to start. For years they’ve waited patiently, pocketing any useful distributions and dividends, but biding their time waiting for some big ticket capital gains.

Unless there’s some “invisible ceiling” at just over 15 000 why should anyone be panicking?

Doesn’t Couch Potato Index Investing preach that you don’t try to time the market, you just buy steadily and hang on for the ride? I’ve never read an index investing article that said there is a maximum the market is allowed to rise.

Why I Am Still Investing a Bit a Month Every Month Into the Index Funds Mirroring the Stock Markets

I’m not the usual type of investor. I’m very conservative and very risk averse. So my portfolio stands on a wide, thick platform of fixed income securities. Enough, in fact, to provide a modest retirement income if all of our other investments failed.

Most of our new money, however, is going into the equity markets.

We are still vacillating about whether to invest the majority of it into income-generating investments or into “buy the entire market” index investments.

While we are deciding, we are putting some of our new investment funds into both. It’s wishy washy but it beats having everything sitting in cash.

So every month, we put a bit more into the stock market in the form of “buy the entire market” “ultra low fee” ETFs.

And I don’t see any reason to stop doing that just because the markets are at “all time highs.” If they never pass today’s “all time high” then there is no actual capital gain ever to be made by investing in index funds. A whole branch of the investing industry is mistaken. They will all lose money and never be able to speak on CTV or CBC again.

That seems unlikely to me. Yes, there may be a market pullback or even a radical plummet. But if you believe that capital gains can be made by investing in an index-matching-style then sooner or later, the money you invested in an index should return to parity and should, ultimately, increase in value.

I don’t like the uncertainty. I don’t like wondering if I might be buying just at the time when the rug is about to be pulled and the market will tumble into a trench it will take years to climb back out of. But that’s the uncertainty I have to accept if I want to invest in index-linked products in order to (theoretically) capture some capital gains worth more per dollar invested than my fixed income investments can yield.

Wish me luck!