Down markets are great if you’re in the stock buying mood. Markets ended 2018 with a thud. In the fourth quarter there were declines of about 16 per cent in Canada and 20 per cent in the U.S., closing the year slightly off these lows. Financial headlines were dire, with many suggesting the worst December since the great depression and predictions of a bigger crash to come.
What caused the reversal of fortune? While there may have been a few potential reasons, like interest rates and the trade wars, the main reason is simply normal market behaviour. Short-term, it is a reflection of the emotions of traders and investors.
For most of our careers, as we move from the ages of 20 to 65 or 70, we are purchasing assets. We are only sellers when collapsing accounts for other needs, mainly funding retirement. Falling markets are good if we have the stomach to buy into these falling markets and eschew the fear generated by headlines.
This concept seems hard for investors to grasp, but I sure like buying more, cheaper. Farmers, more familiar with commodity markets, might also struggle with the concept that down is good. You produce more commodities every year so want strong markets, as you are always selling. With stocks we spend a significant portion of our lives buying, then a long time down the road, selling. We might never sell, as building a portfolio to live off the dividends is possible.
Investors will feel better when prices are going up but in actuality, down markets are both part of the process.
The titanium-strength portfolio
How did our titanium-strength portfolio perform in 2018? The portfolio was started on May 15th, when the U.K., U.S. and Canadian markets were very close to their January 1 levels. While not perfect, this makes comparisons with full year market performance appropriate. Total return is price change plus dividends collected, a fair way to compare our portfolio performance with market benchmarks. Total 2018 returns were -8.9 per cent in Canada, -4.4 per cent in the U.S. and -8.8 per cent in the U.K. The portfolio is about a 50/30/20 split. Using this split, benchmark performance calculates to -7.5 per cent.
1. This portfolio performed better than the benchmark, being up 0.7 per cent rather than down 7.5 per cent. Larger, more conservative companies hold their value better in down markets. Markets average about 10 per cent annual returns so expect a bounce-back.
2. Currency was another key reason for performance and is part of a built-in hedge. In down markets the U.S. dollar tends to strengthen as investors move to safety.
3. There are significant performance differences between the companies. I don’t get too worried about this. My focus is the portfolio. Stocks don’t move in the same direction, which is why diversification is important.
4. Once a year we need to wake up and reinvest dividends. Taking the cash available based on these valuations, I will “purchase” an additional 10 shares of CNR.
5. For the purposes of this demonstration I am not adding to the portfolio, but early 2019 was a great time to add at lower prices.
Putting my money where my mouth is, on January 3, 2019, I added the $6,000 to both my and my wife’s TFSA’s. It was a great day to buy because the market was down a lot that day.