After the market fall, are adjustments called for?
(Photo: George Diebold/Getty)
Congratulations to everyone who grinned and bore it as the whole world’s equity markets went into their recent, but prolonged, slump. The carnage appeared to back off after last Monday (August 8) by which time the S&P/TSX Composite Index had fallen 13.51% over the prior 10 trading sessions, before rebounding like a trampoline on the Tuesday by 438 points. The rally continued for five straight days and some 1,012 index points.
Today, as I write this, the TSX is back down by 229 points, and the market is still down 8.48% since the recent peak on July 22. It could be worse: The major American exchanges are all down much farther and the worst developed equity market in the world is Germany, down 23.28% in four weeks; the best is Mexico’s Bolsa, but it’s still down 4.77%. The Canadian VIX index is up to 30.90, from 13.75 four weeks ago, so investors’ fear element is still much higher than their greed element.
The question now is how to respond to the current situation. The market is down, true, but that fact might be one of the least relevant there is. It matters not where the market has been. What matters is where it’s going, and what to do about it.
Naturally, I have some suggestions. It helps, at times like we’ve had recently and as experienced investors know, to have your investment assets judiciously allocated to cash, fixed income securities and equities, with the equities primarily blue-chip, large-cap dividend payers.
In fact it helps at most times; about the only time a diversified portfolio is outperformed is when a particular market segment goes on a run, as we saw in the tech boom, various resource booms, and when small caps go on their little runs. Most times, though, such segment rallies end in disappointment and too suddenly for investors to recognize it and react in time.
First, if you already have the solidly constructed portfolio alluded to above, you might well do nothing at all. The same as investors grinned and bore it through the recent muck, we can simply decide to take the current environment in stride as one of those setbacks that inevitably occurs as the market chops its way upwards over the longer term. Second, if you don’t have such a portfolio, assemble one now, and ask a competent adviser if you need to.
But what if you’re feeling a little aggressive at the moment? What if you see the current situation as one you want to especially capitalize on, to buy in cheap, to recover your losses faster?
Under that scenario, probably one of the economies you want to emphasize right now—to be a little extra weighted in—is right here in Canada. There aren’t any particular sectors on the TSX that appear to be screaming favorites: they’re all similarly in the red from four weeks ago, save for the global gold sub-index, up 3.24%, but you may not want to touch gold now at these lofty prices. Instead, you could just buy the whole blue-chip part of the TSX Composite in the form of a few units of the iShares S&P/TSX 60 Index (TSX:XIU). They’re liquid, carry an MER of just 0.15%, and will rise in sympathy with the index to which they’re linked.
More aggressive (and experienced) investors might consider plunking down a few hundred dollars on a call option on that same index. A four-month horizon might be the advisable minimum—you can always roll it forward before expiry, and a December 17.50 call can be had for about $1.10 (bid price) right now, or $110 per contract. The index at the moment is at 17.66, so these calls are already in the money.
Similarly, a December 18.00 call goes for $0.78 (bid) right now, or $78 per contract. With the S&P/TSX 60 index currently at 701.20, and the options multiplier at 100, one call would give you $70,120 of additional exposure to the blue-chip part of the Toronto market. Alternatively you could just sit by and wait the market out.
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What to do next?
After the market fall, are adjustments called for?
By David West
(Photo: George Diebold/Getty)
Congratulations to everyone who grinned and bore it as the whole world’s equity markets went into their recent, but prolonged, slump. The carnage appeared to back off after last Monday (August 8) by which time the S&P/TSX Composite Index had fallen 13.51% over the prior 10 trading sessions, before rebounding like a trampoline on the Tuesday by 438 points. The rally continued for five straight days and some 1,012 index points.
Today, as I write this, the TSX is back down by 229 points, and the market is still down 8.48% since the recent peak on July 22. It could be worse: The major American exchanges are all down much farther and the worst developed equity market in the world is Germany, down 23.28% in four weeks; the best is Mexico’s Bolsa, but it’s still down 4.77%. The Canadian VIX index is up to 30.90, from 13.75 four weeks ago, so investors’ fear element is still much higher than their greed element.
The question now is how to respond to the current situation. The market is down, true, but that fact might be one of the least relevant there is. It matters not where the market has been. What matters is where it’s going, and what to do about it.
Naturally, I have some suggestions. It helps, at times like we’ve had recently and as experienced investors know, to have your investment assets judiciously allocated to cash, fixed income securities and equities, with the equities primarily blue-chip, large-cap dividend payers.
In fact it helps at most times; about the only time a diversified portfolio is outperformed is when a particular market segment goes on a run, as we saw in the tech boom, various resource booms, and when small caps go on their little runs. Most times, though, such segment rallies end in disappointment and too suddenly for investors to recognize it and react in time.
First, if you already have the solidly constructed portfolio alluded to above, you might well do nothing at all. The same as investors grinned and bore it through the recent muck, we can simply decide to take the current environment in stride as one of those setbacks that inevitably occurs as the market chops its way upwards over the longer term. Second, if you don’t have such a portfolio, assemble one now, and ask a competent adviser if you need to.
But what if you’re feeling a little aggressive at the moment? What if you see the current situation as one you want to especially capitalize on, to buy in cheap, to recover your losses faster?
Under that scenario, probably one of the economies you want to emphasize right now—to be a little extra weighted in—is right here in Canada. There aren’t any particular sectors on the TSX that appear to be screaming favorites: they’re all similarly in the red from four weeks ago, save for the global gold sub-index, up 3.24%, but you may not want to touch gold now at these lofty prices. Instead, you could just buy the whole blue-chip part of the TSX Composite in the form of a few units of the iShares S&P/TSX 60 Index (TSX:XIU). They’re liquid, carry an MER of just 0.15%, and will rise in sympathy with the index to which they’re linked.
More aggressive (and experienced) investors might consider plunking down a few hundred dollars on a call option on that same index. A four-month horizon might be the advisable minimum—you can always roll it forward before expiry, and a December 17.50 call can be had for about $1.10 (bid price) right now, or $110 per contract. The index at the moment is at 17.66, so these calls are already in the money.
Similarly, a December 18.00 call goes for $0.78 (bid) right now, or $78 per contract. With the S&P/TSX 60 index currently at 701.20, and the options multiplier at 100, one call would give you $70,120 of additional exposure to the blue-chip part of the Toronto market. Alternatively you could just sit by and wait the market out.