That’s what investors saw last week as stock markets rallied for three days before slumping again to close out the week. Here’s what the S&P 500 and TSX Composite Index looked like over the past three months:
At its low on March 23 the TSX was down an incredible 34.2 percent – with most of the damage coming in just a one-month period. The S&P 500 hasn’t fared much better, down 30.75 percent over the same period.
Investors who panicked and sold at the bottom missed out on this brief rally. As swiftly as markets have fallen, prices can rise just as fast. Look no further than March 24, where the TSX surged nearly 12 percent in a single trading day.
But the dreaded “dead cat bounce” theory surfaced Friday when stocks fell again by 5 percent. It seems we’re not out of the woods yet.
As you can imagine, I’ve received a lot of questions from readers and clients about the current state of the market. Here’s what I know:
Honestly, no one knows what happens next. Markets fell so fast and so quick. It’s unheard of to see a 30+ percent drop in one month. For perspective, the worst month of the financial crisis only saw a 14 percent decline.
Many are saying the worst is yet to come because North America hasn’t reached the peak of the pandemic and job numbers are going to look awful. But you could easily argue that the market knows this already and bad news is already priced in. Who knows?
I wouldn’t be surprised if markets fall another 10-20 percent. I also wouldn’t be surprised if we’ve reached the bottom and markets start to stabilize.
Stick to your plan, and rebalance if you can. Mind your personal finances and ensure you have enough cash (or income) to survive the coming weeks and months. Consider delaying any large expenditures planned for the year. One client planned to build a garage this year – that project has been moved to 2021. Perhaps you can divert money earmarked for travel to go into your emergency fund instead.
Much has changed since I shared my 2020 financial goals. Next week I’ll share with you how I’m managing our personal finances and investments through the COVID-19 crisis. Hopefully it gives you some ideas to consider for your own financial plan.
Until then, stay well and stay home!
This Week’s Recap:
Falling interest rates have forced many banks to lower their rates on savings deposits. This week I compared high interest savings accounts to GICs to determine where savers and investors should park their cash.
From the archives: Using annuities to create your own personal pension in retirement
The latest Bank of Canada interest rate cut took its key lending rate down to 0.25 percent. The banks have passed along the decrease to their own prime rate – which means our variable rate mortgage just fell to an unheard of 1.45 percent:
— Boomer and Echo (@BoomerandEcho) March 28, 2020
Promo of the Week:
Canadians can get their Equifax credit score for free from online lender Borrowell. It won’t affect your credit score and Borrowell uses bank-level encryption to ensure your information stays safe.
An important read – Credit Card Genius explains how to protect your credit score during the Coronavirus pandemic.
Exchanging credit card points for gift cards is typically a poor financial move, but Barry Choi argues that using your points to help pay your bills or expenses might be an excellent idea in challenging times.
Zoom Video Communications stock (NASDAQ: ZM) is thriving as employees are working from home and using its technology to stay connected. Zoom Technologies, a Chinese holding company, has also seen its shares spike as investors confuse the two Zooms.
Rob Carrick says banks are trying for a kumbaya moment with their virus response. Can you trust it?
“When banks are e-mailing to say they’re here to help you through this crisis, you might expect at least a touch of self-sacrifice.”
A Wealth of Common Sense blogger Ben Carlson shares a guide to surviving your very first market crash.
Michael James writes a thoughtful response to a reader asking what to do about the stock market crash.
Preet Banerjee has put together a list of free financial consultations and resources for people in need during the Coronavirus pandemic:
Please give Preet a follow on Twitter and on Instagram as he has been diligently putting together helpful videos to explain the Canadian Emergency Response Benefit, and the new temporary wage subsidy (among others).
How the humble GIC goes from schlub to stud in just four weeks as stocks tumble.
Half Banked blogger Des Odjick shares how she’s managing her money during the COVID-19 chaos.
Ben Carlson also shares how he’s managing his own money through the crisis.
Wise words from My Own Advisor Mark Seed, who says there is no perfect personal finance plan to combat something like this.
Nick Maggiulli writes about buying during a crisis – a new framework for investing amid financial panic:
“There is a silver lining for investors who are buyers of equities right now. Every dollar they invest in the current market environment will grow to far more than one invested in months prior, assuming that the market eventually recovers.”
Along the same lines, writer Chris Taylor says, if you can, increase your retirement contributions right now.
Pandemic personal finance update: Three things you can do right now to defend your family finances.
While market crashes can be seen as a positive for those in the accumulation phase, it’s a different story for retired folks. Here’s how the market crash impacts retirees.
Finally, the Irrelevant Investor Michael Batnick explains how to fight hindsight bias.
Stay well, everyone!
For a short time, not too long ago, we lived in the golden age of high interest savings. The competition was lively, as online banks and credit unions pushed interest rates well above 2 percent (LBC Digital briefly paid 3.3 percent). Rising interest rates on savings deposits made GICs look less attractive. GICs paid the same rates or lower, yet savers had to lock-in their deposits for 1-5 years. Where did the liquidity premium go?
High Interest Savings Account rates
The situation quickly changed when the coronavirus pandemic forced central banks to take emergency action and cut interest rates. The Bank of Canada lowered its key interest rates by 50 basis points on two occasions. The ripple effect caused high interest savings account rates to plummet.
LBC Digital had already lowered its rate to 2.8 percent – now it sits at a still respectable 2.25 percent. Wealthsimple Cash had arguably the worst-timed launch when it came out with a 2.4 percent interest rate for its chequing/savings account hybrid. That rate was quickly dropped to 1.9 percent, and then lowered again to 1.4 percent.
EQ Bank lowered the interest rate on its Savings Plus account to 2 percent, while motusbank dropped its rate to 1.75 percent. What a difference a month makes!
Here are the top high interest savings account rates today (March 25, 2020):
As always, savers need to look beyond the big banks to maximize the interest earned on their deposits. If inflation averages 2 percent, then you need to earn at least 2 percent on your savings to maintain purchasing power. Even still, at best you’re treading water.
Despite the recent drop in rates, a high interest savings account is still the best place to park your emergency savings. You never know when you’ll need to access cash for an unexpected bill, or to pay for your living expenses during a period of unemployment.
A high interest savings account is also a must-have for retirees and near-retirees to stash one year’s worth of spending – the first bucket in the three-bucket approach to retirement income planning.
What this current rate crisis has highlighted is the fact that high interest savings account rates are not guaranteed. Those who eschewed GICs to chase higher yielding savings accounts now find their savings account paying 0.50 – 1.00 percent less than it was a month ago. Not ideal.
One of my clients recently alerted me to an email sent by Oaken Financial advertising an increase in GIC rates. Its one-year GIC now pays 2.5 percent, which is a full 25 basis points more than the top-paying high interest savings account. Oaken’s five-year GIC now pays 2.95 percent interest. It looks like the liquidity premium is back.
You’ll easily find one-year GIC rates paying at or above the best high interest savings account rate.
|Canadian Tire Bank||2.50%|
|Wealth One Bank of Canada||2.40%|
Longer-term rates vary widely so be sure to shop around for promotions. Here are the top five-year GIC rates as of this writing:
|Wealth One Bank of Canada||2.60%|
|Canadian Tire Bank||2.55%|
Readers should know that GICs are typically non-redeemable, so you should be absolutely certain that you won’t need the money when you lock it in for 1-5 years.
That means GICs are ill-suited for an emergency fund, but ideal for a goal with a specific time period.
Using High Interest Savings Accounts and GICs for Retirement Income
For retirees and near-retirees, GICs are best-suited for “bucket two” in your three-bucket approach to retirement income. Bucket two is where you build a GIC ladder with three to five years of annual retirement spending.
Let’s assume that your annual spending is $60,000 and you expect to receive $12,000 from a defined benefit pension plan, $8,800 from CPP, and $7,200 from OAS. You have a total of $28,000 from these sources, meaning you require an additional $32,000 per year from your retirement savings.
You’d ideally put $32,000 into a high interest savings account for this year’s living expenses – transferring funds to your chequing account as needed. This is bucket #1.
Then, you’d put $32,000 each into a one-year, two-year, and three-year GIC (total of $96,000). This is bucket #2. When the one-year GIC matures, transfer it to a high interest savings account to replenish bucket #1.
Bucket #3 contains your investment portfolio of stocks and bonds (ideally in low cost ETFs). Each year you may sell bonds to replenish the money in bucket #2, and then rebalance your investment portfolio (potentially selling stocks to replace your bonds).
Using a high interest savings account and GICs in this way provides retirees with a safety net of retirement income so they’re not forced to sell stocks during falling markets. Practically speaking, that means a retiree could delay withdrawals from his or her investment portfolio in a down year like this – knowing there is four years of spending available in cash and GICs.
Cash (or access to it) plays a crucial role in any financial plan. Its importance is highlighted even more during tough economic times, when we’re faced with massive layoffs and falling stock prices.
Well-prepared savers have even been hit by declining interest rates on deposits. My advice to savers is twofold:
- Park your emergency fund or short-term cash in a high interest savings account that pays 2 percent or more. Respect CDIC limits ($100,000) and ideally keep no more than one year’s worth of expenses in this account
- Put additional cash savings into a GIC (or GICs) while being mindful of when you’ll need to access the money. Is it worth an extra 25 basis points to lock your money in for five years? Consider a shorter term or a GIC ladder approach.
Readers: Where are you parking your cash these days?
What does it mean?
For some, it’s public relations and a true sense of caring. The message from Galen Weston resonated positively across Canada as the Loblaw CEO promised stocked shelves, clean stores, and a commitment not to hike prices (that one might be tough to swallow coming on the heels of a massive bread price-fixing scandal).
For others, it’s blatant marketing. Like when Canada’s big banks joined in solidarity to announce a six-month mortgage payment deferral option for vulnerable Canadians. Details were sparse, and when pressed for more information the banks refused to elaborate, saying each situation would be evaluated on a case-by-case basis.
It turns out the six-month deferral is simply an already existing ‘mortgage payment vacation‘, where interest still accrues and the deferred payments are just added to the end of mortgage amortization period. Still, that might be much needed relief for some Canadians who find themselves with no or low income in the coming months.
Listen, the banks stood in solidarity this week offering to “help” by allowing mortgage deferrals. No details, just on a “case-by-case” basis. Turns out the cases need to be pretty unique and the relief offered is pretty weak. It’s fair to criticize.
— Boomer and Echo (@BoomerandEcho) March 20, 2020
The problem is, CBC reported that customers who began to inquire about mortgage payment deferrals faced confusion, delays, and outright denials from Canada’s big banks.
“Alyson Whittle of Cochrane, Alta., said her bank, B2B, which is a subsidiary of Laurentian Bank, told her she could defer her next mortgage payment but then the following payment would be double.”
This is not helping.
Canadians need money in their pockets now. The new Emergency Care and Emergency Support benefits announced this week as part of the federal government stimulus package won’t be available until April. Provinces and municipalities will try to fill in the gaps, but for many vulnerable Canadians it simply won’t be enough.
There have been 500,000 applications for EI this week, compared to just 27,000 the same week last year.
Some businesses will voluntarily step up and offer customers a lifeline, like Apple and Goldman Sachs offering to cover interest payments for Apple Card customers.
But why can’t government work with big business (banks, utilities, telecoms) to immediately pause payments for three months (act now, figure out the details later) and truly provide financial relief to struggling Canadians?
We already know the financial bailouts and stimulus packages needed to survive this pandemic will be massive. We also know that government programs require applications, delays, and endless red tape.
Big businesses are already set-up to provide direct relief because they have automatic recurring payments scheduled for their customers. Put a hold on payments for three months and send the bills to the federal government.
Yes, that’s unprecedented. Yes, some people don’t need direct relief. But now is not the time to worry about that. The government can always clawback the payments from high income earners on their taxes next year.
If there was ever a case to be made for Universal Basic Income – a three-to-six month trial that puts money directly in the hands of Canadians – this would be it.
Do it now, we can debate it later.
— Boomer and Echo (@BoomerandEcho) March 20, 2020
“We are here for you.” Canadians don’t need platitudes. They need immediate relief. These don’t need to be empty words. We are all in this together.
This Week’s Recap:
On Tuesday I shared my pension decision, whether to keep a deferred pension or take the commuted value and invest on my own. Many thanks to Alexandra Macqueen for the expert guidance.
On Thursday I wrote a comprehensive post to explain how to apply for EI benefits.
Over on Young & Thrifty I offered my best financial advice amid the coronavirus crisis.
From the archives: Coping with stock market losses
Promo of the Week:
Friend of the blog Mike Heroux is the author of The Dividend Guy Blog and the owner and portfolio manager at Dividend Stocks Rock (DSR). He also worked for 10 years as a private banker and financial planner.
Mike has put together a free webinar exclusively for Boomer & Echo readers this Tuesday at 1:00 p.m. EST.
In this webinar you’ll hear about Mike’s dividend growth strategy, including some of his top dividend stock picks. The end of the webinar includes a free Q&A session with Mike where he will gladly discuss any investment topic with you.
Register for this exclusive (and free) live webinar here at Dividend Stocks Rock.
Smart stuff from our friends at Credit Card Genius, who share the credit card combos for saving on essentials and earning cash back during a pandemic.
Finance Minister Bill Morneau announced the RRIF minimum withdrawal rules will be 25 percent lower for 2020.
The How To Save Money team put together a guide for those who are dealing with an unexpected job loss due to Coronavirus layoffs.
Millionaire Teacher Andrew Hallam says the financial media is doing more harm than good with COVID-19.
Ben Felix explains why every market drop feels different thanks to the power of a compelling narrative:
Retirement planning expert Wade Pfau offers some wisdom on what to do when markets plummet:
“We tend to make long-term decisions based on short-term performance. Large recent market gains lead us to be optimistic about our chances, while market losses have the opposite effect.”
David Aston shares three things retirees can do now to protect their cash flow and portfolio.
Should you buy stocks now? Nick Maggiulli explains what one important market signal is saying.
Tim Cestnick shares five ways you might benefit as interest rates drop like a rock.
Travel expert Barry Choi explains how COVID-19 affects insurance policies.
My Own Advisor Mark Seed offers some great advice on how to get through a stock market crash – and benefit from it.
A hands-off policy for your portfolio amid market volatility is usually the best advice, but there are exceptions to that rule. When standing pat doesn’t sit well:
“The long-running equity market rally I think tended to make us all a little inert about making changes. It was easy to be comfy when everything was going up. We’ve had a little bit of volatility. So, I do think that if retirement is within the next five to 10 years for you, think about derisking your portfolio if you haven’t taken any steps to do so in recent years.”
Preet Banerjee offers some thoughts for those who are living paycheck to paycheck and worried about a loss in income:
Finally, Rob Carrick asks how an interest rate cut helps a population that has decided its number one priority is to buy toilet paper? Indeed.
Have a great weekend, everyone!