When the markets make you want to hurl

Investors prone to motion sickness were likely queasy throughout 2022, when markets pulled back in the early months and stayed volatile throughout the year, closing out with the three major indices posting their worst annual losses in 15 years. If economists and market analysts are to be believed, the coming months will continue to see investors tossed up and down, albeit in more episodic bouts of volatility. As you tend to your patients in 2023, consider how you might also keep your finances healthy—or at least viable—in the face of lurching markets. Pause yourself It’s human nature to react quickly to threats. Alan Acton, vice-president and portfolio manager at Ottawa-based Polaris Wealth, saw this in action in 2000 when investors spooked by the poor performance of government bonds rushed to buy U.S. equities. “I had to try and convince people not to buy U.S. equities but in fact to sell them and buy fixed income assets to keep their portfolios balanced,” he recalled. “But I had doctors asking me why should they buy a bond with a 2% yield when ‘I get 65% on my U.S. equities?’” The answer became apparent in the subsequent years, said Acton, when bonds out-performed equities and investors who had put their money in 10-year U.S. treasuries fared better than those who put it in stocks. Rebalance to target Keeping your portfolio balanced is always important. It’s even more so in volatile markets that have shredded fixed-income investments—as they did in the early aughts—while bouncing stocks around. The result in many cases, said Acton, is a portfolio that’s off-kilter and off-target. To underline the importance of rebalancing, he cited a $2-million portfolio with a balance target of 50% equities and 50% fixed income. After the worst-performing year for bonds in a century, the fixed-income portion of the portfolio might now be down to $800,000 from $1 million. But with today’s higher interest rates the yield on these bonds will be greater than in previous years. “Fixed income is underweighted now in a lot of portfolios,” said Acton. “So you need to rebalance the portfolio to get it back to your weighting target of 50-50 equities and fixed income.” Look beyond returns It’s easy to lose sight of the big picture when the view in front of you feels so urgent and compelling. As you ride out the markets’ ups and downs, look at other ways beyond portfolio returns to bolster your financial plan, suggested Mike Sheffar, a financial planner and partner at SPM Financial in London, Ont. For instance, you may want to think about transitioning some of the taxable investments in your corporation into an insurance contract that allows you to continue building value on a tax-deferred basis. “Because you’re sheltering these investments from tax you’re getting a lift in your overall plan,” said Sheffar. “This would be a good move for a doctor in the middle stages or peak earning phase of their career.” Use a cash wedge Another piece of advice from Sheffar: If you’re retired or about to retire and you have one or more years’ worth of cash set aside in a rainy day fund, consider using this money instead of pulling from your portfolio. “Ideally, when markets are strong, you’re drawing down on your equity portfolio and spending dividends and capital gains, and leaving cash for market downturns,” he said. “Use your rainy day fund until the market recovers.” Adapt your plan You probably had certain numbers in mind when you created your retirement plan. Maybe you wrote down $10,000 as the income you’ll need each month after you stop working. With continued market volatility hammering away at your portfolio values, you may want to rethink your retirement income goals, said Acton. “Maybe go down to $8,000. That’s a 20% reduction, which will add longevity to your retirement plan.” If you really need to withdraw the full amount you initially had in mind, he added, accept the fact that today’s lower returns mean your portfolio will dwindle down more quickly. “There’s nothing you can do—everything has gone down,” said Acton.

When the markets make you want to hurl

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