Rocky stock market not a reason to change up your RRSPs and investments

[A sign board displaying Toronto Stock Exchange (TSX) stock information is seen in Toronto June 23, 2014. REUTERS/Mark Blinch]

If you’re the panicky type and you have anything invested in the Canadian stock market right now, chances are you’re already pulling hair out and checking your pulse on a regular basis.

Following an 11.1 per cent decline last year that doesn’t’t really tell the tale (since it started in a rut and finished in a deeper rut), the S&P/TSX Composite index has only picked up the pace of its decline in 2016, currently on track for its third straight month of decline. And with oil in the toilet and the Canadian dollar worth a few U.S. coins at this point… well, at least we have hockey, right?

In historical terms, the drop so far isn’t really a crash (yet?), so we’re not talking bankers out on ledges. But the outlook is tricky. With demand for oil well below supply and interest rates about as low as they can go, it’s tough to see where the endpoint is.

So, what’s an investor with a modest stash of RRSPs and hopes of retiring before age 80 to do? Sell your stocks and buy bonds? Move it all into cheap U.S. real estate? Cash in everything and bury the bills in the backyard next to the Ebola shelter? If you’re thinking of doing any of this, take a deep breath and log off the trading website, advises Edmonton-based financial blogger and author Jim Yih.

“If you’re in your 20s, 30s or even 40s and you’ve got a ways to go until you need the money in retirement, it’s not a message you haven't heard already, it’s stay the course,” he says.

It sounds comforting, but the feeling doesn’t seem to be unanimous.

Headlines are warning of a 2008-esque market crash, and Royal Bank of Scotland advised its clients in January to “sell everything” except high quality bonds.

In other words, some people think it’s going to get a lot worse before it gets better. That kind of thinking can lead to panic moves, like selling stocks that have fallen on the expectation they will continue to fall, says Yih. It’s a move that can work, but woe betide the investor that gets it wrong.

“I’m not a market timer at all, so I don’t think it works. I think it’s too hard to predict. I think you get lucky once in awhile, but you also make poor decisions once in a while. So the bad decisions wipe out the good ones and the good ones make up for the bad ones,” says Yih.

Tom Bradley, president and co-founder of Vancouver-based Steadyhand Investment Funds, says part of the trouble with selling is that you have to figure out when to get back in.

“There’s just tremendous evidence that that the hardest decision in investing is getting back in the market after you’ve sold out, and for all kinds of reasons,” he says.

It’s easy enough to say you’ll buy when stocks have fallen further, but what do you do if they rise for a few days? Is this the rebound or just small gains before it continues to drop? Make the wrong decision and you’ll find yourself buying stocks back at higher prices than you sold them for.

Adding to this is that during a market downturn, it can feel like every day is a new piece of bad news, leading to a sense that the bad days will never end. It can blind you to the fact that beaten down stocks are the best deal out there. And once the market decides it’s sold enough, things can turn around in a hurry.

“People get very invested in their negative view,” says Bradley.

“I’ve met thousands of clients over the years, and the ones who have gotten out of the market may have been heroes for a short time, and felt good about themselves, but their long term returns were considerably impaired.”

Instead, says Bradley, the key is to plan ahead so you don’t have to panic.

Make your investments monthly, rebalancing your portfolio once a year, which means buying more of your weakest performers. It can seem counterintuitive, but it was Warren Buffett who once advised to be greedy when others are fearful and to be fearful when others are greedy.

“The proper answer is the whole investment industry is built on a foundation of guesswork,” says Yih. “We’re all trying to guess something that can’t be accurately guessed, predicted, or forecasted. So that’s why the investment industry has defaulted to this idea of asset allocation and rebalancing.”

What that means is doing your homework ahead of time. And if you haven’t, there’s probably not much you can do at this point, except hold on and hope it ends soon.

“Once the market has taken a dive, it’s not the time to react, it’s not the time to try and realign the entire portfolio,” says Yih. “The time to do that is before things happen and when times are good.”

And if you’re a retiree in need of cash, Bradley suggests selling the more conservative investments instead of the stocks.

There’s another old market nugget to keep in mind, too, about how when the newspaper headlines scream “buy” you should be selling. In that light, the headlines calling on investors to sell everything could suggest a different course of action.

“When was the last big buying opportunity? 2008,” says Yih.