Ready to weather this market storm? Ask yourself these six questions

All investors these days are keeping an eye on the markets, interest rates, inflation, central bank comments and thoughts of a recession. Everybody wants to know, “When will it end? What is going to happen? What can I, or should I, do about it now?”

If you think someone really has the answers to these questions, please let me know who it is. What follows is purely my opinion as an observer with many decades of experience. I can only tell you what I think and put in writing what questions we should ask ourselves.

First, let’s hedge inflation. The cost of things is going up. The easiest thing to notice is the price of gas for your car. It’s always been up and down and we expect that to happen. What we fail to recognize is that it goes up and it does go down, but it never seems to go back down to the lowest point before going up! In the long term, gas prices have continued to rise. When I started driving, the price of gas was $0.70. And that was for a gallon, not a liter. That is inflation. Some manufacturers try to trick us into thinking they are not raising prices. They are not on the surface, but instead of increasing the price of their products, the size of their packaging or the volume of product in the package is getting smaller. In these cases, the amount of food that a budget buys is less and less.

There are many factors that influence the cost of these goods: raw materials, transportation of the raw materials, assembly to finish the products, and of course labor.

We are in a time of lower unemployment. You see signs everywhere that companies are hiring. Workers are demanding higher wages, not only because workers are in short supply and can command a higher price, but because they need to earn more to cover their higher costs of living.

It’s a bad chicken-and-egg analogy: You pay more for work, then you have to charge more for goods or services, then the consumer has to earn more to pay for the increase. When will the cycle stop? This contributes to higher inflation.

How are governments going to reduce inflation? By raising interest rates, which directly increases costs for businesses, which then slows business expansion and growth. It also slows down the hiring of employees. But really? If businesses are short-staffed now, how can they operate with even fewer employees? How can they even hire someone if they have to pay that employee more than before?

If central banks hope to raise interest rates to stop or slow inflation, should they do so at 0.50% or 0.75% at the same time? Does it make sense to rip the bandage off and raise rates by 2%, 3% or 4% and be done with it?

How important is it to announce that an economy is in recession? The definition of a recession is two consecutive quarters of negative GDP growth. That explanation I think is thinking about the rearview mirror. What does it matter if it’s already happened? How important is it to say that we are in a recession? What if the first quarter has negative growth, the second quarter is flat, and the third quarter has negative growth? Do people expect an increase in interest rates to have an instant impact on GDP growth? My view is that it takes several months of rapid growth to revive an economy, so economic slowdowns shouldn’t happen overnight.

I will remind you that we have just been through a pandemic that the world has never seen before. It was basically a worldwide shutdown. There is no textbook that covers “what if?” in this situation. No one really knows what will happen. You can easily find experts who say it’s going to get worse, and many will say it’s over and things will get better.

It’s okay. Enough economic talk. What are we doing as investors to help us weather this storm?

We have to ask ourselves six things:

– Are the companies we own in danger of going bankrupt and closing?

– Is there any risk that a dividend will be cut or lowered?

– Do we have too much in a single stock, – like more than 10% of the total portfolio?

– Are any of our holdings particularly sensitive to changes in interest rates?

– Will my financial plan be affected if I sell my shares and only keep the cash?

– Are we worried and losing sleep because our portfolio has lost value?

Answering these questions is necessary to ensure that one’s portfolio is adequately diversified and, more importantly, that one can answer “no” to them.

I often use the analogy of owning a rental property and the housing market crashes. Would you rush to sell that house? We all know the answer is no. As long as there isn’t a structural weakness in the house, something affecting the location, or a termite infestation, for example, simply continue to collect rent. You should have the same mindset when owning stocks. The big difference is the speed at which you can sell any of these assets, as a house can take several weeks before you can put it on the market to sell. Stocks can be sold with a simple phone call or the push of a button. People often react too quickly because it’s so easy and then make a rash decision.

This opinion piece of mine is simply to give you some things to think about before making decisions that are not well thought out, and when you may not have considered all possible outcomes. Investing should be guided by logic, not emotion.

Nancy Woods is a Vice President, Portfolio Manager and Investment Advisor for RBC Dominion Securites Inc.

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