by Gordon Pape
As world stock markets plunge, many investors are panic-selling. Bad move - most will likely regret it later! Here's a list of measures you should be taking now to protect yourself and some moves to avoid at all costs.
These are ugly times! The stock markets are diving and no one can predict how deep this correction will be. So what investment strategies should you adopt now to ride out this turmoil? Here some suggested dos and donts:
Do hold cash. In times such as this, cash is king. The return will be low, and will go lower as interest rates fall. But your capital is protected and having cash reserves enables you to move quickly when the time is right to buy.
Dont bottom feed. Stocks in the sectors that have been hardest hit so far, such as U.S. financials and real estate, may look like screaming bargains right now. But they appeared to be good value a month ago and since then they have fallen even more. Remember what happened to investors who went shopping for high-tech stocks in mid-2000 after the first wave of the collapse had passed. Those stocks looked like bargains then. Most turned out to be dogs. There will be a time to buy these beaten-up issues, but its probably not here yet.
Do some selective shopping. While I dont recommend buying U.S. financial and housing stocks yet, there are good values emerging among companies that appear to be relatively immune to an economic downturn. Just as a rising tide lifts all boats, a falling tide is having the opposite effect. For example, when the shares of Rogers Communications (TSX: RCI.B) fell to below $40 last week, I began adding to my personal position. Rogerss wireless growth may be slowed by an economic downturn but all those cable and cell phone subscribers arent going to vanish overnight. Im not saying it has hit bottom but if the price drifts lower, I intend to keep building my position. I believe it will eventually pay off but check with your financial advisor before acting.
Dont throw out the baby with the bathwater. In every market downturn, some investors reach a point where fear overwhelms common sense and they sell everything at any price. That happened most recently in November 2006 in the days immediately following the announcement that the government would tax income trusts. Those who blew all their trust units out the door in reaction have long since come to regret it. Dont make the same mistake now. If you feel you must get rid of some stocks or equity funds, wait for the rebound that inevitably follows a sharp correction and sell into strength.
Do own some bonds. Ive said for years that bonds are the best line of defence against a stock market correction. That proved to be true in 2000-2002 and it is turning out the same way once again. As of the close of trading on Jan. 21, the DEX Universe Bond Index was up 1.29% so far this year and the various government bond indexes were doing even better. By contrast, the S&P/TSX Composite was down 12.3% year to date. In the final six months of 2007, the average Canadian bond fund gained 3.3%. The average Canadian equity fund lost almost 1%. Where would you have rather had your money?
If you are still not a bond believer, its time to wake up!
This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada's top money experts. The IWB was chosen by The Globe and Mail as one of the top five investment newsletters in Canada. For more information about becoming an Internet Wealth Builder member, Click Here