Weekend Reading: Investing In A Market Crash Edition

One knock against passive investing is that while it’s great to match the market’s performance in good times, it’s not as fun to watch your portfolio drop when the outlook turns bearish. Indeed, index investors like me have seen their portfolios take a 20-25 percent hit in a relatively short period during the COVID-19 crisis.

Investors got real-time look at their risk tolerance as they watched their portfolios drop in value. Here are two things I’m doing to help keep my wits and stick to my plan:

1. Avoid checking my portfolio too often: It’s tempting to sneak a peek at your portfolio value, especially after a bad day in the market. But it can be psychologically draining to see your portfolio lose money. I use Wealthsimple Trade, which is a mobile-only trading platform. I hide the app in a folder on my phone to limit the temptation to check on my investments.
2. Stick with regular automatic contributions: You’ve probably heard all kinds of strategies to deal with these tumultuous times, from selling everything and waiting out the storm, to backing up the truck to go all in with your investments. As for me, I’m sticking with my regular investing schedule by having my contributions automatically taken from my chequing account. By doing this, I’ll avoid any regret that might come selling or buying too much during this market crash.

Bear markets don’t last forever. As a long-term investor, learn to tune out the noise and stick to your investing plan.

This is why investing with an appropriate asset mix is so important for index investors. My portfolio consists of one ETF – Vanguard’s 100% global equity ETF called VEQT. Year-to-date it’s down 20.93% (as of April 3, 2020).

Let’s compare that to someone who invested in Vanguard’s VBAL, which represents the more traditional 60/40 balanced portfolio. VBAL is only down 13.28 percent as of April 3, 2020. It has held-up remarkably well during this period of extreme volatility.

Active investors might prefer an ETF like Vanguard’s VDY – which represents high dividend yield stocks in Canada – since dividend stocks tend to be wide-moat, blue-chip companies that can theoretically weather a downturn better than most other businesses. That hasn’t been the case so far this year, as VDY is down 22.95 percent year-to-date.

Don’t let today’s turbulent market dissuade you from starting (or sticking with) your ETF investing journey. My advice is to think long and hard about your risk tolerance and the type of losses you’d be willing to accept. Find an asset mix that matches your risk profile, and then build your portfolio with an asset allocation ETF, or 3-4 ETFs that you can maintain and stick with over the long term. 

Alternatively, you might prefer a more hands-off approach like what you’d get with a robo-advisor managing your investments.

One benefit of using a robo-advisor that doesn’t get a lot of attention is how they help remove human emotion from the investing process. It’s no secret that market crashes bring out the worst in investors. We sell when markets fall. We keep way too much cash on the sidelines. And we try to time the market to get back in (often too late).

Robo advisors help investors during market crashes by automatically rebalancing according to a pre-determined set of rules. This takes human judgement (and error) out of the equation and keeps the focus where it belongs – on your original investment plan.

Let’s say you have $100,000 invested in a 60/40 balanced portfolio. Stocks have fallen 20 percent or so, meaning your portfolio now looks something like this:

• $48,000 in stocks
• $40,000 in bonds

Your overall portfolio is down 12 percent, and, more importantly, your asset mix is out of balance. Stocks now make up just 54 percent of your portfolio while bonds are at 46 percent.

A robo-advisor will automatically rebalance by selling some bonds and buying more stocks to get you back to your 60/40 target mix. Your new portfolio will look like this:

• $52,800 in stocks
• $35,200 in bonds

This is a small example of something that’s going on behind the scenes with your robo-advisor all of the time. There’s a reason why rebalancing is called the only free lunch in investing.

How did Wealthsimple’s 50/50 balanced portfolio hold-up during the COVID-19 crisis? It’s down just 5 percent in the three months ending March 31, 2020. Not bad, considering broad stock market indices are down 20-25 percent over the same time period.

This Week’s Recap:

On Tuesday I wrote about how I’m managing my personal finances amid the COVID-19 crisis.

Over on Young & Thrifty I shared the best investments in Canada from across the risk spectrum.

From the archives: On Making Rational Financial Decisions

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CERB Application Portal:

The application portal for the Canada Emergency Response Benefit opens on Monday (April 6). To help manage the application process, the CRA has set up specific days to apply:

• Monday April 6 for those born in January, February, or March
• Tuesday April 7 for those born in April, May, or June
• Wednesday April 8 for those born in July, August, or September
• Thursday April 9 for those born in October, November, or December

The CERB will be available to workers:

• Residing in Canada, who are at least 15 years old;
• Who have stopped working because of COVID-19 or are eligible for Employment Insurance regular or sickness benefits:
• Who had income of at least $5,000 in 2019 or in the 12 months prior to the date of their application; and
• Who are or expect to be without employment or self-employment income for at least 14 consecutive days in the initial four-week period. For subsequent benefit periods, they expect to have no employment income.

Other financial measures announced by the federal government include a special GST payment and a one-time enhanced Canada Child Benefit payment. Check out Preet Banerjee’s COVID-19 income support estimator to see how much you might be eligible to receive.

Weekend Reading:

PWL Capital’s Ben Felix takes us through the history of bear markets to explain how each downturn is different and why we eventually recover:

A Wealth of Common Sense blogger Ben Carlson shares some words of wisdom from his mentor William Bernstein.

This Toronto landlord told his renters, go ahead and skip the rent during the coronavirus pandemic:

“I really don’t care about money right now, I care about YOU … You shouldn’t be struggling to find a roof for your family.”

After years of hoarding housing supply, here’s why Toronto Airbnb hosts are panicking.

Credit Card Genius shares an incredibly thorough look at the latest coronavirus travel updates and advice for Canadians.

The Irrelevant Investor Michael Batnick with a smart take on when to rebalance your portfolio.

Humble Dollar writer Jonathan Clements gets personal and shares how he’s managing his finances and investments during the crisis.

Here’s two great posts from Michael James on Money:

• How a retirement plan responds to market volatility
• Why annuities are great in theory, but maybe not in practice

Finally, I enjoyed this take by Rob Carrick who describes six personal finance ideas that have been blown to pieces by the pandemic.

Enjoy your weekend, everyone. Stay safe!