We expect increased volatility across all asset classes – stocks, bonds, commodities and real estate — meaning investors have to be patient and diligent to find buying opportunities. Stock valuations still appear to be stretched. The market could easily go sideways for the next two years until earnings catch up to current prices. Or, in the interim, the stock market could fall 20 per cent to return to proper equilibrium.
For investors, it’s important to:
- Hold cash to prepare for market corrections or to take advantage of buying opportunities. We currently hold 20 per cent cash times the client’s equity weighting. If the portfolio is 100 per cent equities, they’ll hold 20 per cent cash. If the asset mix is 50 per cent stocks and 50 per cent fixed income, they’ll hold 10 per cent cash (50 per cent multiplied by 20 per cent).
- Stop reaching for yield. A stock’s current yield isn’t as important as the dividend growth rate. The average dividend payer on the TSX Index increased its dividends by 9 per cent this year. For the S&P 500 Index, it was 11 per cent. Dividend growth is necessary to offset inflation. Buying a stock with a high yield but no dividend growth means that inflation eats away at an investor’s spending power and the value of the investment deteriorates over time. This is especially bad for retirees.
- Take advantage of opportunities. If a stock drops 20 per cent more than the overall market performance and there’s nothing wrong with the business model, this often presents buying opportunities.