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Your investments and the coronavirus

Investors are already facing the devastating impact of the coronavirus. The stock market went into free fall in early March, eradicating many years of investment gains. Looking at the ruins of a prosperous investment portfolio, investors are wondering how to react to the precipitous drop in value of their retirement nest egg.

Here are some of the questions investors ask.

  1. Shall I get out now and convert my portfolio to cash?
    It’s an emotional reaction, but it is not recommended. You need a balanced investment portfolio to stay ahead of inflation. If you convert everything to cash, in 25 years inflation will shrink your portfolio by more than 50%, assuming an annual rate of 3%. To having to sell off your investments at fire sale prices, you should also have a cash reserve on hand large enough to pay for one year of living expenses plus any major planned expenses, such as a new car or an exotic vacation.
  2. When is a good time to get back into the market?
    When the 2008 stock market collapsed, investors were quick to sell, but were slow to buy back in. They waited too long and missed out on the big bounce back gains.

    To conquer your fear of missing out, or FOMO, adopt a strategy called dollar cost averaging. By using this technique, you will put into the market say $10,000 per month. It does not matter whether the market is up or down, you invest the same amount of money. When prices are down under the dollar cost averaging method, you buy more shares than when prices are high. Especially when the market is as volatile as it is now, dollar cost averaging can provide great benefits.

  3. Should I sell some stocks and buy more bonds to reduce volatility?
    It is prudent to construct a well- diversified portfolio to weather the ups and downs of the stock market. But you have to wait. With the Bank of Canada lowering the interest rates, the value of bonds increase. Many investors don’t realize that if interest rates drop, the price of bonds go up. Therefore, to convert now makes no sense, since you are selling stocks at a loss and buying bonds at a premium. It is a double whammy.
  4. Should I remortgage my real estate with the drop in interest rates?
    Absolutely, you should take advantage of the lowest interest rate in years. When was the last time you were able to get a 5 year closed mortgage for 2.79%? Your mortgage broker can advise you whether it would be beneficial to remortgage in your situation.
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