Hey! .... Dip! .... Shit!?
Who has a crystal ball? Nobody! The 5-6% (if you're lucky?) drop in your portfolios in the last couple months is reminding everyone why your portfolio diversification and quality is more of a priority than trying to find that next windfall. Even though the market is not very predictable, human behavior in the market seems to repeat itself over and over and over. Bond sell-offs in a rising interest environment, investor flights to cash equivalents and precious metals during war-times, people selling off their holdings in non-dividend paying or underperforming stocks due to high interest environment worries, or just selling out of basic fear and uncertainty. People tend to hoard money and simply quit spending when there is uncertainty. Rising housing, food, and gas prices demand it. This is not necessarily bad, because it has a cooling effect on the market overall, which slows down the inflationary pressures brought on by high consumer demands for stuff they don't need. But none of these cooling effects are seen overnight or are necessarily linear. And because people have short memories, future interest rate hikes will remind them when they forget. The market (again) seems to be trying to find a new foothold in value, and the average investor's behavior during all the uncertainty today is not that surprising or alarming.
The way I tend to look at it is longer term, in windows of 5-10 years. For example, a $100k holding in a strong company with $50 shares, paying a 6% dividend yield that is dripped back into the same holdings over time, will generate another $40-50k over 5 years. In this scenario, you can effectively lose 30-50% of the face value of this stock, while still maintaining the same value from dividends reinvested into that stock over 5 years! And the reality is, that stock will likely not drop that low, and if it does, it will recover it’s price in the 5-10 year window, providing a more appealing exit point if you want it. It will also be at a lower cost basis, meaning you don't need to wait to get back to the original price, .. if you choose? Worth noting, taking some losses when selling these shares is not necessarily bad in every situation, and can actually help you avoid capital gains tax on this or other stocks. In a bear market it’s a good time to consider adding to your strong stock positions, to drive your position costs down further. Many people will do the exact opposite. They sell in panic or fear in falling markets, losing money on their position cost plus losing solid income from the dividends, then try to time a re-entry point when the shares are on the upswing. The exodus of investors when the stock price is falling and the re-entry of the masses when the stock price is rising is good for those who stayed put and added to their positions at lower price points. On the fall there are cheaper stocks to pick up that drives your cost basis down while increasing your dividends, and on the rise your position gets some jet-fuel as the market cap tends to go higher in this scenario significantly improving the stock price. The history and math says staying invested will almost always give you better results, unless of course you have bought into an under-performer or some meme stock and/or long shot like Gamestop.
But that is stocks, and personally I only invest in stocks where it makes sense, and in smaller stakes (~15% of total portfolio value) compared to my ETF holdings, which are WAY MORE diversified and balanced. Although, my non-registered investment accounts and TFSAs seem to be slowly growing as money transfers from the registered accounts into them as savings. I hold my stock plays in non-registered accounts where I can take advantage of the Canadian dividend tax credits, or in our TFSAs where I can shelter all income from taxes. My registered accounts all hold a single, global, balanced, income-producing Vanguard ETF called VRIF designed to pay retirees 4+% and takes the brainwork out of my decumulation plan. When I buy stocks, I attempt to get into high value, dividend paying Canadian stocks when they are discounted. I also like REITs and hold roughly 15% of my portfolio in VRE, a Vanguard REIT. To me, REITs are like owning a rental property, but with huge diversification and without management or renter hassles.
The war between Russia and Ukraine has everyone on edge these days. The words "recession" and "nuclear" have had extremely tempering effects on the world economy. A degree of de-globalization is in effect with NATO nations applying heavy economic sanctions on Russia that are not likely to go away in the near term, even if a settlement is reached. Non-Russian companies are pulling their operations and capital out of Russia in droves, and the Ukraine is asking for, and will likely get, more support from NATO going forward. Putin has given new life to the Cold War era, and other countries with unbalanced leaders and aligned beliefs are starting to rise up and make the news, if you believe the news these days? North Korea and China need to be cautious, or they may find themselves in the same boat as Russia, isolated from the rest of the world in terms of trade and banking. But what does this all mean for the west? Probably not much in my opinion, right now anyways? Sanctions on China could have a very inflationary effect, but for their own sake I can't see it leading to this? I think for now we have the depth and synergies in our western economies to be self-sustaining, and hooks into other economies to support the long term effects of shunned Russian exports. Plus, Russia and Ukraine are not economic super-powers, though they do have more of an influence in Europe with energy and food supplies. This alone has caused some Eurozone NATO countries to squirm and pull back from all the sanctions the west has imposed on energy and trade. Oil and gas are Russia‘s greatest resources, and without this export, the Russian economy will totally collapse in short order. Europe has developed a reliance on Russian oil and gas over the years, and it is not easy to ween off the Russian supply. However, ... never say never!! NATO countries relying on Russian energy are already making alternative plans, and even if Russia stopped their war today, I doubt these countries will reverse their efforts now to replace their Russian dependency on energy. The damage is already done, and the risks to Eurozone energy supplies are now very exposed. When it comes to the market. I can almost guarantee oil and gas competitors or energy providers are looking for opportunity and resolution to the Russian energy reliance in Europe. But this is not an overnight change, it will happen in the next 5-10-15-20 years. I’m not sure Putin has a long term vision, or if he does, he is simply blinded by his totalitarian goals for land and control.
Bottom line, there are so many points in history where market dips (or recessions) occurred for different reasons. The market always finds a way back and wins in the end. The end of an opportunity in Russia means the start of an opportunity somewhere else. Inflation and interest rates are transitory and will eventually correct themselves. Energy will find a new balance in the world. It won’t happen overnight, but it will eventually happen, and strong, well-managed companies always survive.