2019 was a terrific year for stock market returns. This bull market has gone on for so long now that investors can’t help but wonder, are we due for a correction this year or in the near future? 

It’s a question I get a lot from my clients these days, especially the soon-to-be-retired and the recently retired. Understandably, they want to take some risk off the table in preparation for an inevitable correction.

It makes sense. As we watch stocks continue to reach all-time highs, we want to believe we are “due for a correction”. This type of thinking has occurred several times in the past 10 years, and if you chose to pull money out of the market to avoid a potential correction you would have missed out on even more gains.

The truth is, nobody knows if or when a correction will take place. The best we can do is guess at a range of possible outcomes based on historical returns. As investment blogger Nick Maggiulli points out in the investor’s fallacy, markets are never “due” for anything:

Assume I flip a coin 5 times and get the following result (let H = heads and T = tails):

HHHHH

What is the probability that my sixth flip is also a heads (H)? Assuming the coin is fair (equal likelihood of heads and tails), you already know that the answer is 50%. Because coin flips are an independent process, prior flips have no bearing on future flips.

But it doesn’t feel that way does it?

What’s an investor to do? First of all, we know that any money invested in the stock market is money we won’t need to touch for at least five years. That means, for a retiree or soon-to-be-retiree, you have an appropriate amount of your spending needs in cash (1 year), another bucket of spending in short-term bonds or GICs (3 years), and the balance of your portfolio invested in an appropriate mix of stocks and bonds. 

Since we know the long term trajectory of the stock market goes up, we’re not concerned about any short-term volatility. We have four years worth of spending available in easy-to-access cash or fixed income instruments – plenty of time to ride out any market crash and avoid tapping into our investments at an inopportune time.

For younger investors in the accumulation stage, a market correction represents an ideal time to buy stocks at a discount. Again, since you won’t need to touch these invested assets until retirement, a correction should be treated like a buying opportunity as opposed to a scary event.

What want to avoid is the notion that we have any predictive abilities whatsoever when it comes to market events. No one can correctly identify the ideal time to escape a correction, or to get back in to catch the ride up. Indeed, these events tend to happen close together, with the stock market’s worst days followed closely by its best days (and vice-versa).

That’s why it’s best to stay the course with a sensible long-term investment strategy – even at what could potentially be the tail end of a long bull market. The only time you should be worried about a correction is if you need the money within the next five years and haven’t made an appropriate plan to access the cash.

If that describes your situation then now might be a perfect time to consider trimming some of your portfolio gains from last year and building your two retirement income buckets (1 year of spending in cash, 3 years of spending cash in GICs). 

This Week’s Recap:

I felt especially grateful that I get to work from home and that I didn’t have to venture out too much in the brutally cold temperatures this week. 

Earlier this week I explained the difference between tax deductions and tax credits.

Next, we had a reader story from Kevin who wrote about his ‘mortgage gambit’ where he loaned himself a mortgage from his LIRA

Promo of the Week:

To help kick-start your 2020 savings, Oaken Financial is giving away a GIC with an opening value of $500 to one lucky winner! How to participate? Simply fill out all required information on this link (takes 1 minute)

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Weekend Reading:

Millionaire Teacher Andrew Hallam explains why your financial advisor doesn’t deserve credit for your gains.

Rob Carrick offers some great advice in this column on whether to pay down the mortgage or set aside an emergency fund:

“When you own a home, the pilot light of anxiety about both expected and unexpected costs is never off. The best way to ease this worry is to have financial resources you can draw on.”

I was happy to contribute to this excellent piece by Jonathan Chevreau in MoneySense on mutual fund fees and the future of investment advice

Dan Bortolotti updated the 2019 Couch Potato Portfolio returns for his model portfolios. Of note:

  • Tangerine Balanced Portfolio – 14.06%
  • TD e-Series (Balanced) – 14.79%
  • 3-ETF Balanced Portfolio – 15.02%

How did your investments perform in 2019? Did your balanced portfolio come close to those returns? If not, maybe it’s time to switch to a passive indexing strategy.

David Aston delivers the definitive answer to the RRSP vs. TFSA debate.

Our friends at Credit Card Genius look at the best small business credit cards in Canada.

Air Miles has a Flight-A-Day Giveaway where you can earn a chance at a $25,000 flight voucher.

Travel expert Barry Choi answers the question: Is the American Express Platinum Card worth the $699 annual fee? 

American Express Membership Rewards is arguably the most valuable travel rewards point ‘currency’. Barry Choi explains how the Amex Fixed Points Travel Program works.

Speaking of rewards programs, it’s time for Aeroplan to stop grabbing back the miles of their inactive customers.

Alyssa Davies at Mixed Up Money looks at how meal planning saves you money. Indeed, this budget friendly exercise has saved us thousands of dollars over the years.

Preet Banerjee shares his latest Money School video with a look at how to save money on term life insurance:

Finally, a long but important read on the topic of aging and how we’re using technology (a pacemaker is just one example) to extend our lives – yet what happens when the mind gives out before the machine?

Have a great weekend, everyone!

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4 Comments

  1. Maria @ Handful of Thoughts on January 18, 2020 at 5:22 pm

    As someone who is not looking to draw on our funds anytime soon I’m hoping for a good buying opportunity. That being said we just invested in our RRSP and are not going to wait to time the market.

  2. Matthew on January 18, 2020 at 7:59 pm

    I love laughing at the ETF Couch Potato crowd, especially the reddit clowns at r/personalfinancecanada who cannot get their heads around anything but CCC. My professionally managed brokerage account returned 29% this year. Too bad according to that crowd it’s impossible to beat the market…there method is a sure way of that.

  3. Frank on January 19, 2020 at 4:49 pm

    Hi Robb, Back in Jan. 2018 you offered a copy of your budgeting spread sheet. I am just now trying to do a budget. I tried to get your spreadsheet but nothing loaded up. Is it still available? If not do you know of another available at a reasonable cost. Thanks, Frank

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