Recession is coming, time to freak out
The recession is coming, it’s time to freak out! OK, I’m kidding of course. Is the recession coming? Honestly, I have no idea, but the market sure has turned from ugly to downright dreadful in the last few weeks. A few weeks ago we saw the biggest 15% points drop in the history. Then on March 9 we saw the third biggest single day drop since the Second World War.
Once you combine the recent market meltdown and the uncertainties over COVID-19, a lot of people are freaking out. Some people are hoarding toilet paper by the boatload at Costco, some people are selling all their stocks and putting cash under their mattress, some people are fighting over the incredible (not) GIC rates at below 2%, and some people are pawning their gold teeth for money.
It sure is hard to stay positive when apocalyptic news is popping up everywhere, your neighbours are hiding in their panic room in the basement while praying their hearts out, and you are making more money than your investment portfolio from dog sitting for your freaked-out-sky-is-falling neighbours.
Back in mid-Feb, before the free fall happened, our dividend portfolio value was at its all-time high. A month later, we have seen a loss of over $200,000. Some of our holdings are now in the negatives, including stocks that we bought a number of years ago.
Am I freaking out? No, not really. I still fall asleep within minutes of my head touching the pillow and I still sleep through the night. I am not waking up in the middle of the night with cold sweat and worrying about all the loss we have taken. I am not waking up in the middle of the night screaming bloody murder because we are experiencing a significant loss in the portfolio value.
Believe me, all is not lost. I am optimistic that things will calm down and the market will turn around eventually.
Since we are still in the accumulating phase of our financial independence journey, a downturn is actually a welcomed event. Why? Because a downturn will allow us to purchase stocks at a discount while still racking in juicy dividends. For example, Royal Bank was trading around $108 back in February and yielding around 4%. At time of writing, Royal Bank is trading around $90 and yielding around 4.83%. If I were to deploy $10,000 to purchase Royal Bank, I would be getting 19 more shares at $90 per share compared to $108 per share. Furthermore, instead of receiving around $400 in dividends each year from Royal Bank, I would be getting almost $83 more in dividends per year. Now let’s not forget that Royal Bank has been paying dividends since the late 1800s and the company has never cut or suspended any dividends…
When I first started investing in individual stocks, I purchased stocks called ING (now it’s called Intact Financial, IFC.TO) and Manulife (MFC.TO). I purchased both stocks well before the financial crisis. When the financial crisis hit, ING’s stock price went from the mid $50s down to the low $30s, or a drop of over 40%. Shortly after I purchased Manulife, the company cut the dividends, causing the stock price to drop from around $30 all the way down to around $9. Back then, I thought about selling both stocks and cutting the loss. Fortunately, I was investing with money that I didn’t need in the short term. Rather than selling these stocks and taking a significant loss, I decided to hold onto them both and collect dividends instead. A few years after the financial crisis, the stock price started to recover and I started to see positive returns on these two holdings. Even after the latest market meltdown, I am still seeing positive returns for these two holdings.
One of the advantages of holding dividend-paying stocks is that you have time on your side. If the stock price is lower than your book price, you can wait for the price to recover and collect dividends in the meantime. If you are fortunate to hold enough shares so you can DRIP additional share(s) whenever there’s a dividend payment, that’d allow you to slowly average down your cost basis. Similarly, if you hold an index ETF that pays distributions, you can just sit back and wait. Of course, you can afford to wait as long as the dividend-paying stock or index ETF doesn’t cut its dividends or distributions. This can be considered as a psychological benefit. The same isn’t true when you own a non-dividend-paying stock such as Amazon, Google, or Facebook. You won’t be getting paid any dividends, therefore, it could be harder to resist the temptation of selling the stock when the stock price is in a downward spiral.
Perhaps the problem for some investors is that they started investing due to the fear of missing out. They heard about the long bull market and saw many of their friends making money with their investments. The fear of missing out meant these investors may have started investing without having the right psyche. Rather than asking themselves the three important questions before investing, they jumped in the market not fully prepared. Perhaps they invested with short term money that they needed, perhaps they falsely identified their risk tolerance (i.e. growth rather than conservative), perhaps they didn’t understand what they were buying, or perhaps they were borrowing money to invest. When Mr. Market temper tantrums and the future looks bleak, these people freak out, start to lose sleep, and decide to sell low. Unfortunately, they become the textbook example of buying high, selling low.
Remember, the stock market is like a roller coaster. It has its ups and its downs. Please do not freak out about the recent meltdown. Please do remember that the stock market has a historical long return of 8%. Invest for the long term and ignore the noise.
Rather than stocking up on toilet paper and other apocalypse necessities, we will continue to stock up on dividend-paying and index ETFs periodically and take advantage of the suppressed pricing.
Dear readers, what are you doing during this volatile time?