Don't Panic, Stocks Are Going On Sale
May 10th, 2022 | RR
The United States could be headed into a recession, but that will depend on whether the GDP numbers for Q2 are in the negative like they were in Q1. Canada seems to be doing a bit better, despite many economists warning of a recession here as well. Usually, though, if the U.S. goes into a recession, Canada and most of the world follows. The worst thing anyone can do in a situation like this is panic, sell all their stocks and jump out of the market. The best strategy is to stay calm and to view a recession and a subsequent market crash as a fire sale.
Overall, the S&P 500 is down 18% year-to-date, but the S&P TSX is only down 6%. In any typical recession, markets can crash by 30%, meaning we are only half way there. Rather than offload all your stocks and ETFs before things get worse, you can hang on to them and let them regain their value over the next few years. If you're a long-term investor, you should follow two simple rules that nearly every successful investor has followed: never sell a stock when it's down; and only buy stocks in companies and industries you believe in.
If we do enter a recession, your portfolio will be drowning in a sea of red. Your crypto, your energy, your ETFs and all of your equities will be down by big margins, leaving you depressed and worried about how much money you've lost. Don't let that get you down. It will bounce back and patience is the one most important skill any long-term investor cannot survive without.
Historically, every single stock market in existence today has only seen growth. On a long enough timeline, your investments will grow. Evidence for this can be seen in the S&P 500, Dow Jones and the Nasdaq composite index. All of those indices have been on a constant upward trajectory since their inceptions. Every other global stock market index has grown constantly over time.
The S&P 500 was conceived in 1923, the Dow Jones in 1896.
Ever since, the indices have grown consistently on a long term basis. Along the road, there are recessions, corrections and bear markets. As seen below, the S&P 500 has trended upwards for nearly 100 years. On average, it has taken three to four years for the market to fully recover to pre-recession levels. The 2008/09 recession was an exception, which took the S&P 500 more than six years to return to 2007 levels.
As is the case with every recession, those who bought stocks made a lot of money over time.
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Anyone who bought stocks in Microsoft in 2009 would have made a 45% return by the same time in 2010. By 2011, it would have been a 50% return. Anyone who bought Wells Fargo stocks in February of 2009 would have seen a 50% return by 2012. Anyone who bought any stocks in the spring of 2020 would have seen extraordinary returns by the spring of 2021.
Of course, that's under the assumption that a person who bought stocks did so wisely—meaning they did their research and didn't just take advice from their uncle Frank who happens to be an expert in beekeeping and has bought one stock in his entire life. That's also assuming they didn't just buy whatever stock they saw trending on a Monday afternoon.
If you're a long-term investor, you'll need patience and strategy. Don't let your emotions play any part in what you're doing. If you just started investing and buying ETFs last month, you're probably looking at your portfolio today and feeling like you've made a huge mistake. You're seeing lots of red and minus signs—but that's normal. These are fairly normal market swings in volatile times and they will change again. The only time you actually lose money is when you sell a stock at a lower price than when you bought it. If you keep it, it will regain its value over time if it's a quality stock.
When I bought my first stocks and ETFs, my portfolio spent the first two months in the red before it finally turned green.
Over a long enough period of time, your portfolio will turn green and probably stay green, as long as you haven't bought any low quality stocks in poorly run companies. If you're a long term investor looking for safe and guaranteed returns, you would have purchased a lot of ETFs. These are exchange-traded funds, which are similar to mutual funds but traded daily on the stock market. These offer the best way to keep a green portfolio and to hedge yourself against one or two poorly performing stocks.
Rather than buy a few stocks in Suncor and Chevron, you can by an energy ETF like NXF.TO, which has Suncor and Chevron among its holdings. The swings and returns may not be as big as they would be on individual energy stocks, but the returns would be stable and consistent over time. ETFs like this also offer exposure to U.S. oil companies on the TSX in CAD, without having to pay conversion fees on the New York exchange.
Once you crack open the world of ETFs, the possibilities are almost limitless.
You can buy ETFs in travel, like TRVL.TO which has Expedia, Hilton and Delta Airlines among its holdings. You can buy ETFs in emerging markets, the FTSE, Canadian banks, global infrastructure and ones that track Japan's stock exchange. You can even buy an ETF called HERO, or the Evolve E-Gaming Index, which has Nintendo and Roblox among its holdings. There are also ETFs to track crypto, blockchains, commodities and base materials.
Investing has never been easier than it is now.
"Historically, every single stock market in existence today has only seen growth."
Almost every major Canadian bank has its own trading platform. If you consider yourself a cautious peasant, you can start on platforms like Wealthsimple Trade, which let's you start with as little as $1 and has zero fees and commissions on trades in Canada. They will, however, ding you with conversion fees on foreign stocks and on crypto. If you stick with the TSX and Canadian ETFs, you can trade entirely for free.
If you have more than $1000 to start, platforms like Questrade will do the trick—but you'll be paying commissions and relying on their clunky app.
If you have already started, you probably don't need any of my advice. Just keep in mind that recessions are not a cause for panic. Hang on to every stock and ETF and buy up the ones that have dropped in value. In five years, you won't regret it.
If you own stocks through an old fashioned, human stock broker—withdraw it all. You're wasting your money by paying someone else to manage your investments. It's 2022 and you can do it yourself. The internet has made investing possible for almost anyone with an IQ over 100. Download an app or sign up to a platform, upload your photo ID, fill out the information, open a TFSA and start buying. Every penny you spend on a physical brokerage is a penny you could be using to compound your earnings in a self-managed portfolio.
Bear markets and recessions don't last forever, but the deeper this recession goes, the bigger the discounts.
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