So, what exactly is going on?
Despite all the statistics and market history, stock prices are falling because investors are selling risky assets like stocks in favour of less risky assets like cash. These investors traditionally do not have proper advice and sell for the wrong reasons. They often don't have financial planning and often don't understand that falling stock prices of good companies should not be a concern — it should only be a concern if those companies stop their dividends or lower them. Unfortunately, these investors often don't own dividend paying dividend growing companies that pay them for owning the company — they instead hold companies that don't pay them anything and depend solely on growth.
Some people are worried about the ongoing trade war with China, others about a global economic slowdown, others about rising interest rates — again, there's no way to know how these things will impact the markets going forward. The bottom line is that when investors suddenly become emotional — fearful, optimistic, and generally have an awful uncertainty of the future — there's usually no one simple reason. But over time, the markets get through these things. The markets went up through two World Wars, the Great Depression, the 2000 Tech Bubble, the 2008 Financial Crisis, along with many other less significant events. In fact, every single year there are many reasons the markets are going to "fail", yet 75% of the time, the markets end the year up — although it's looking like this year will be one of those down years.
So what does all of this mean for you?
Don't stress — we own positions in companies that have a strong history of paying, growing, and not cutting their dividends. Furthermore, we've done all the planning around your situation and can show you that you'll be OK. You should never stress until what you own starts cutting dividends. Why? Because the goal is to live off the dividends and alternative income streams instead of dipping into your saved capital or depending on growth. Further to this, although the goal is to not rely on the growth of a company, companies that pay dividends grow at a greater rate over time than those that don't. The idea is that you will never dip into your saved capital... therefore, whether your investments are down, or conversely, up... you should never get too excited unless a company cuts their payments to you.
In regards to the markets, over time, markets go up. So while less risky assets like cash can perform relatively well in the short term (like they have over the past couple months), it's very unlikely they'll outperform risky assets like stocks over the long term, as they never have. And because we have done financial planning for you, and understand that you will not need to dip into your saved capital (you'll live off what your investments pay you), your time horizon is theoretically infinite, and the value of your underlying investments should not be of concern unless what those investments pay you declines.
The uplifting news is this, despite the bad press about the stock market and the risk associated with dipping your financial toes in the ponds of stock investing, our financial markets produce great wealth for its participants over time and along the bumpy path, pay you steady streams of income in the form of dividends. Stay invested for the long-haul, continue to add to your investment, and mange risk appropriately, you will meet your financial goals.
On the other hand, if you try and use the stock market as a means to make money fast or engage in activities that throw caution to the wind (we typically do not work with these types of clients), you'll find the stock market to be a very cruel place. If a small amount of money could land you big riches in a short time span, everybody would do it. If you're looking to make fast money, go to the casino, your odds are better to quickly grow your money there rather than quickly growing your money in the market. Your odds of catastrophic loss at the casino are also lower than a risky "get rich quick" investment in the market. Yes you read that right! If you're not willing to put a certain amount of money all on red at the roulette table, than you most certainly should not be willing to put a certain amount of money in the market in an attempt to "get rich quick".
Our advice? If your goals haven't changed, stick to your plan. It was created to help you reach your financial goals knowing there would be periods of volatility along the way. If your goals have changed, your plan needs to be updated immediately to see if you'll be OK — you likely will be. Then relax, watch some Christmas classics and eat too much. While you're doing that, we'll be keeping a close eye on your investments, the cash flow you receive on those investments, and how they relate to protecting your wealth.
If you have any other questions — or are just looking for a little reassurance — we're always here. Please reach out to our team at (306) 956-7806 or josh.opheim@rbc.com
Merry Christmas!
Josh Opheim