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Surviving A Market Meltdown

It’s crisis time again!

Gordon Pape has some advice on how to survive a market meltdown.By Gordon Pape, Editor and Publisher

Every few years, fear overcomes greed and stock investors hit the sell button. The triggers can be as diverse as the sudden collapse of a hedge fund to a full-blown financial crisis, such as we experienced in 2008.

This time around it’s the novel coronavirus. People are increasingly worried that health care workers can’t contain it. If it becomes a pandemic, the result could be thousands of deaths and a devastating blow to the world economy. The final cost of the SARS outbreak in 2003 was an estimated $40 billion. I have seen estimates that this time around the cost could exceed $1 trillion and we could end up in a recession. No one knows.

The stock markets were overdue for a correction even before this new virus emerged from a wild animal market in Wuhan, China. It’s been 11 years since we’ve seen a bear market and share prices looked bloated, especially in technology companies. But as long as the U.S. economy kept ticking along and job creation was strong, no one seemed concerned.

That’s all changed. Last Monday, the Dow dropped more than 1,000 points, or about 3.5 per cent. An attempt at an early morning rally on Tuesday quickly fizzled out and by the end of the day the Dow was down another 879 points (-3.15 per cent). Another attempt at a rally on Wednesday also failed and the Dow lost 124 points. Thursday morning (the deadline for this column) was even worse. Between Monday and Thursday morning, the Dow lost 2,542 points or 8.8 per cent in less than four days. Since its all-time high earlier this month, the Dow is down 10.3 per cent. That’s consider an official correction. The S&P 500 is almost there, with a drop of 9.6 per cent from its high.

In past columns, I have written about how to prepare for a correction. But that’s history. Now we’re actually in one.

So, what to do at this point? Here are some suggestions.

Don’t sell quality.

Think back to what happened in the fall of 2008. Even the best companies lost value as the entire market collapsed. But once the blood-letting ended in early March 2009, almost all these stocks came back and eventually went on to new highs. Anyone with some cash available could have doubled their money in a couple of years by investing in blue-chip stocks near the bottom.

Do sell speculative issues.

I never recommend buying speculative stocks, but some people can’t resist in the hope of scoring a huge gain. In a buoyant market, that can happen. But when everything is selling off, it’s far less likely. In fact, some borderline companies may go under if things get too bad, leaving you holding an empty bag. Better to take a hit now than to lose it all.

Do keep bonds.

Few people thought bonds would do well this year, including me. After last year’s strong gain of almost seven per cent in the FTSE Canadian Universe Bond Index, spurred by falling interest rates, there didn’t seem to be much upside.

But those calculations did not consider the impact on the bond market of something like the novel coronavirus. Investors have been scrambling for safety, pushing yields down and raising bond prices. (Yields and prices move in opposite directions.)

As I write, the FTSE Universe Bond Index is up 3.45 per cent year-to-date, much better than the TSX. Long-term government bonds are ahead 6.15 per cent.

The main exception is high-yield bonds, which are showing only a minimal gain year-to-date. Default risks for marginal companies rises during times of economic stress, putting downward pressure on their bond issues.

Bond ETFs are the best choice for most people. The iShares Core Canadian Universe Bond Index ETF (TSX: XBB) is up 3.8 per cent year-to-date, reflecting the performance of the underlying index.

Do own gold.

Like bonds, gold is considered a safe haven in times like these. If you don’t own any and have some cash, add some stocks or ETFs to your portfolio. As I write, the price of Franco-Nevada (TSX, NYSE: FNV), my favourite gold stock and one I own personally, is ahead 18 per cent since the start of the year. The price of the SPDR Gold Shares ETF (NDQ: GLD) is ahead 8.6 per cent.

Don’t try to time a recovery.

We have no way of knowing how long the virus will remain a disruptive force. Some health officials believe the coming of spring and warmer temperatures may slow it down, but that’s an untested theory at this point. If you have some cash to invest, keep it in reserve until the market has moved up 20 per cent from its low. At that point, the recovery should be well established, and you can deploy your cash.

Living through a market correction is never easy.

That applies especially to one like this where there is so much uncertainty and the stakes are so high in both human and financial terms.

But this too shall pass, the markets will recover, and a new bull will start. Be ready when it does.


This article originally appeared in The Toronto Star.