Continued market turmoil means it’s time for a gut-check . portfolio

This year has been ugly for equity markets. Through the close of trading Friday, the US benchmark S&P 500 had tumbled 15.73 per cent since the calendar turned to 2022, and the Canadian benchmark S&P/TSX Composite Index was down 5.44 per cent.

Markets don’t always go up, but considering most Canadians need to invest in those two indices to meet their retirement goals, who wouldn’t be rattled?

This is definitely not the time to sell stocks that are already down. The winning plan is to buy low and sell high.

Market weakness often presents a good opportunity to assess how well your portfolio is equipped to handle the bad times.

Here are a few things to consider if you have the stomach to do a gut-check portfolio. You can do it on your own, but a qualified advisor can provide better insight and do an assessment with less of an emotional stake.

Are you holding the right stocks?

Legendary value investor Warren Buffett compares market selloffs to skinny dipping. When the tide goes out, he says, you can see who is swimming naked.

Like equity markets, the tide impacts everyone — some more than others. The least impacted stocks tend to be the best; those with healthy balance sheets and steady profits.

They also tend to be the stocks that recover first and reach new highs once the market catches on.

If you already own them, it could be a good opportunity to own more.

Does it pass the diversification test?

A good portfolio should always be diversified across sector and geographic lines to temper losses confined to one sector and exposure to stronger performers.

Technology stocks, for example, have been hammered this year; Meanwhile, energy stocks have been among the star performers. Last year at this time, their performance was the inverse. At the time, technology gains were tempering energy losses. Now energy gains should be tempering technology losses.

If your diversification strategy is working, your portfolio losses should be less than the broader benchmarks.

Is my portfolio generating a reliable income stream?

This year’s market losses should also be tempered by income-generating investments in your portfolio.

Low yields, caused by low interest rates over the past two decades, have put fixed income out of favour. Even so, a one per cent gain can help lift an entire portfolio from a 20 per cent loss.

As interest rates rise, the payoff from safe fixed income such as government bonds, guaranteed investment certificates (GICs) and investment-grade corporate bonds are becoming more appealing. Shifting your portfolio weighting from stocks to bonds over the longer term will make future market turmoil less stressful.

A fixed income strategy should be part of a broader income strategy to generate a reliable cash stream near, or in, retirement. That strategy would include dividend income from stocks, which are not as reliable as fixed income because payouts are at the discretion of the company and the whims of the market.

Stocks that fit the description mentioned above could include equities with strong and reliable dividend payouts. Examples are real estate investment trusts (REITs), Canadian telecom companies (one of those telecoms is BCE Inc., which owns BNN Bloomberg through its media division), and big Canadian banks. They tend to be staples in Canadian retirement portfolios — either directly or through mutual and exchange-traded funds. This week, the banks were getting a lot of attention.

Barclays’ head of research for Canada, John Aiken, told clients to expect a dividend “bonanza” from the banks in their upcoming earnings season.

He also noted bank stocks are cheap in relation to earnings in the historical context, which would bring them into the “buy low” category.

Put another way; With the market tide out, Canadian banks are wearing bathing suits.

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.

Leave a Comment