Anticipating the next financial crisis

The Ritcey Report

October 13, 2016

John Henzl, a financial columnist for The Globe and Mail, offered some prescient advice recently (Report on Business, October 1, 2016) about how to prepare for the next financial crisis – if it happens. Now that ‘if’ is a big one, but market meltdowns are a bit like natural disasters – we’ve just been hit by the residue of Hurricane Mathew, after all – they’re often unpredictable and unavoidable. And while I don’t agree with all of Mr. Henzl’s suggestions, most of them make sense.

Be prepared
A market adjustment of any kind is not the time to assess: 1) whether your portfolio is suitably diversified and 2) structured according to your tolerance for risk. I do not advise my clients to own speculative shares in money-losing companies. Nor are their portfolios weighted too heavily in a single sector. Prudent diversification is crucial always, and never more so than right now.

Investment policy statement
The creation of an investment policy statement (IPS) – a written summary, including asset allocation, investment horizon and long-term goals – is fundamental to wealth accumulation. It’s your blueprint for success. And while market volatility is an inevitable part of the investing process, having a strategy – an IPS – can help you successfully navigate even the choppiest of waters.

Be an owner, not a speculator
As Henzl observes: ‘Some investors forget – or don’t understand – the real purpose of buying a stock: to own a piece of a business and to share in its profits’. Stocks are not like cards in a deck, something to be endlessly shuffled. The value of a stock is a reflection of the earnings the company generates – and good companies grow their earnings over time. Be patient.

Carry some cash
While I generally advise my clients to be fully invested, a market sell-off can be a great time to put excess cash to work. The key is to look for companies with a strong balance sheet, supported by a solid history of rising earnings and dividends.

Count your dividends

Focusing on the dividend income your portfolio generates – rather than fluctuating stock movements – is an excellent way to cope with market volatility. If you own a diversified portfolio of blue-chip dividend stocks that raise their dividends regularly, your income should go in only one direction: up. And that’s more reassuring than nervously watching the market go down.