Dips, Corrections and Crashes

EPISODE SUMMARY

In this episode, Evan discusses what might be going on in the market when you see headlines mentioning dips, corrections, crashes, or bear markets.  Declines in the market happen more frequently than you’d probably think, so Evan provides tips to successfully navigate declining stock markets.

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TOPICS IN THIS EPISODE

1. Defining dips, corrections, crashes, and bear markets 
2. Clarifying how often these events occur and how they likely happen more often than you realize
3. Tips to survive these types of market conditions 
4. Know that you aren’t alone during these types of market events!

RESOURCES MENTIONED

Recessions and Bear Markets - Investor Guide


OTHER EPISODES

45. Why You Should Care About Rising Interest Rates 

47. Guide to Recessions and Bear Markets


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Transcript

Hello and welcome back to the Canadian Money Roadmap podcast.  I’m your host, Evan Neufeld.  Today we're talking about the big scary markets. We're looking at dips, corrections, crashes, and bear markets. What do these things actually mean? And a few tips for surviving these types of market conditions.

Right before we get started today. I want to thank everybody for joining me. We've got a lot of new listeners, especially from Spotify, it’s pretty cool to see where all new listeners are coming from. But if you're listening from Spotify now and you've enjoyed some of these episodes so far, please feel free to click follow, and you can see every new episode, every couple of weeks in your feed. Also Spotify has a new rating system.  So, if you wouldn't mind giving me a rating, hopefully an honest rating, but if you really like it to hit a five-star rating for me and that'll help more people find the podcast.

Okay, so for today's topic, we are going to be looking at dips, corrections crashes, and bear markets. This seems to be pretty topical right now, because ever since the beginning of January, things have been looking pretty ugly and red more often than green. So I thought this would be a good time to talk about what these things actually mean and a few tips for making sure that you can come out the other side of these things.

So when you look at financial news headlines, you're going to see these terms a lot. So dips, corrections, crashes, bear markets, pullbacks, and all these things. The problem is that most of them don't have a specific definition. I'll try to give you some guidelines so you can understand what's going on in the news a little bit when you see headlines that seem a little bit scary, and then you can interpret it for yourself to see where things are at for your portfolio. So the first one is a dip.  General consensus here says that that's probably a market decline of about 5% or less.  This is pretty common, this happens a lot. Statistics would say that the stock market has a 5% decline or worse, 95% of years. Okay. So this is happening all the time. This is rarely anything to get too concerned about, because it happens all the time. So if the market's down about 5%, know that its probably going to happen again next year too.

Now a correction, the term correction almost seems a bit insulting because for you to lose a portion of your money, doesn't feel correct or that it's becoming more correct. But that's maybe another topic for another day, but the term correction is often used for a decline of somewhere between 10 and 20%.

The idea is that the market always overreacts in both directions, so it goes up too much and then it goes down too much. A correction, meaning at about a 10% decline that is implying that the market was overheated by a little too much. Sometimes that's accurate and sometimes It just goes down for a variety of reasons, but that's the term correction there.  So about a 10% decline. Now a 10% decline has statistically happened 63% of years. So two out of three years, you're going to see at least a 10% decline in the market. Again, this is really, really common. Doesn't mean it hurts any less or it's not scary or anything like that. But just a reminder that even though we haven't had one of these in a long while that they do happen often, and this isn't a sign of Armageddon or anything like that.

Now at 20% decline, this could be categorized as a crash, but I see crash as something, it's both distance and speed in my mind. So a crash would be probably more than a 20% decline, but it happens very, very quickly and very quickly would generally mean less than a month, I would say.

But let's just talk about the depth of the decline here. We'll call that more than 20%. So a 20% decline in stocks generally happens once every four years, 26% of the time. Again, that's relatively common, but far less than, than the smaller drops of course. These ones are becoming a little bit more rare, but the speed at which they're happening is increasing.  So if you think back to March of 2020, there was a big decline there that happened very, very quickly. We haven't seen a drop that sharp since about 1987, the black Monday crash. Those are both pretty unique times in the market, but anyways, a 20% decline happens once every four years.

Now 30% decline or worse happens once every 10 years. And that seems to add up if you start looking at the different periods of time. In most recent history anyways, 2000 then 2008 and then again here in 2020s, kind of averages out to once every nine or 10 years or so there is a 30% decline. There's no specific name that I'm thinking of for this type of thing, but you can file that under a crash or a decline.

Another term that you've probably heard of often, which doesn't really have a lot of logic behind it, is a bear market. To be honest, I'm not even sure where the terms bull and bear market came from, but I'll just explain what that means in general. A bear market is a longer sustained downturn, typically at least two months or longer, more than 20%. A bull market is kind of the opposite where it's a general uptrend. So a bear market isn't necessarily a crash, but one can lead to the other.

So that's what the terms, dip, correction, crash, and bear market kind of mean and how often they happen, which if you're with me on that, they happen probably a lot more than our recent memories would lead us to believe. But here's some thoughts on ways that you can help keep yourself invested and stay positive, at least mentally during these periods of time.

The first one is the only guarantee I ever give to investing clients is that the only guarantee is that the less you look, the better you sleep. So I don't recommend that you look at things every day. Maybe check on things every month, especially if you're a long-term investor here.

If you're a do-it-yourself investor, who's managing your retirement savings. That might be a little bit of a different story because you have a monthly impact on where your cashflow is actually coming from. But if you're a long-term investor and you're relatively young, you've got a long-time horizon in front of you.  Don't look all the time, especially when things are a little bit scary. It's not going to do you any favors.

The second one is diversify. And I know that's kind of a buzzword and things that come up all the time. But when we talk about “the market”, we have to keep in mind that are more than one market out there. Okay. So when people refer to “the market” here in Canada, that might mean the Toronto stock exchange(TSX).  So that could be everything that's traded in Toronto. But a lot of financial news media is American and when Americans refer to “the market”, they generally mean the S&P 500, but they could also be talking about the Dow Jones industrial average, or the NASDAQ or the Russell 2000. These are all different types of markets or indexes that look at different companies altogether. So if you look online, there's probably some prevailing wisdom or I've seen so many things that say that you only need to own the S&P 500 and own it for the long-term. Well, there's also been periods of time where the S&P 500 has looked like an absolute loser over a whole decade.  So you look at the period between 2000 and 2009, and the S&P 500 is one of the worst investments you could have held during that time.  So should you just own the S&P 500? Will I argue that you probably shouldn't. So as Canadian investors here, the opposite is also true. Should you own just the Toronto stock exchange? It's probably not because they might move at a similar time, but it's not always perfect and it doesn't always happen at the same time.

So generally speaking, don't own just one. Own a little bit in Canada, own a little bit in the US, own a little bit outside of north America as well. So that way, if the market conditions are different in any part of the world, you're not necessarily exposed to just that one countries specific risks. 

Another one here that I alluded to already, knowing your timeline. So if your timeline is 20 plus years from now, maybe even 10 plus years from now, a decline actually implies that you can buy more right now. So if you're a long-term investor, you don't necessarily want to be seeing all-time highs every day.

That feels good, but that just means that every time you buy it, you're getting a worse price for whatever you're buying. So if your timeline is long, just keep that in mind that you're continuing to buy things regularly at lower and lower prices. 

That leads me to my fourth point here of contribute often. So if you're contributing to your investment accounts monthly, I would say maybe adjust that to bi-weekly. Especially if you get paid every two weeks or twice a month, whatever you do, maybe set it up on a pay schedule. Another thing I like to do is actually invest weekly, just use a smaller amount yet, but have it go in every week because as we're seeing right now, markets are really volatile and they're moving down pretty quickly, but the opposite is also true.  So after periods of decline, markets typically rebound quite quickly. So you want to be able to be sure that you're investing often enough to be able to take advantage of these declines instead of missing out on them. I forget who said it, but you never want to waste a good crisis. Hopefully that's not too on the nose for right now, but there are opportunities for long-term investors to be able to take advantage of lower prices all the time.

Fifth one here, it relates to that as well of buying low and I stole this from Josh Brown. You might've seen him on CNBC or read his blog, The Reformed Broker, but one of his tips that he recommends to his readers and his clients is to set a psychological limit of where you would actually take some of your cash that you have on hand and that's where you would actually buy. So say for example, the fund that you're wanting to buy is currently at $30. Well, you could just say to yourself, okay, if this thing goes down to 25 bucks, I'm definitely buying. That way, in his words and experience you almost trick your mind into rooting for the downturn instead of getting fearful of it, because you can quantify then how much more of an investment you're actually going to buy when the market declines by a certain amount.

It's kind of a goofy little trick that probably doesn't work for everybody. But if you're sitting on a little bit of cash, think about that, maybe set a ridiculously low-price target so that if it does actually hit that, you know that you're going to do the right thing and invest more money at that point, instead of pulling it out and securing your losses.

The final item that I'm going to say here is just a reminder to yourself that you're not alone. When the market declines, that implies that the average is going down. So assuming that most people are invested in the stock market are owning much of the same stocks that you are, everybody's kind of in the same boat. And so the feeling of being alone is something that really impacts people, especially when it comes to personal loss and when it comes to your money, that feeling is very real as well. So just remind yourself that you're in this with everybody else, but you have the opportunity to act in such a way that you are able to benefit from this, as opposed to just letting the market happen to you.

Finally, maybe one more thought for retirees, if you don't have regular income from your job and you don't have the opportunity to invest more every month. The opportunity that you have to take advantage of a market downturn is to use your war chest. So I've talked about this on a few podcasts before, but I recommend that retirees have a certain part of their portfolio allocated for their regular withdrawals for their monthly income.

This is generally comprised of relatively lower risk; cash and bonds and things like that. And so the reason you have that is for times like this. So when stocks go down, bonds and cash will go down less, typically. Okay so if that is the case, and if we're in a prolonged period, remember we call that a bear market.  So for a longer period of time where stocks declined significantly more than your other parts of your portfolio. Then you can use some of your war chest, actually take advantage of that. So you're not investing from your bank account. You are just reallocating from within your existing investments. So if you're a mutual funds, you can just make a switch and if that's in an RRSP or a TFSA, there won't be tax implications of that. But if you're in ETFs or stocks, we'll have to make a sell and then you can do a subsequent purchase, which is no problem at all. But that way you're rebalancing your account to make sure that your allocations between your war chest and your stocks stay relatively even. But when you do that, you're making sure that you're actually buying low and using your investments that have held up.

So, let me just give you a one final summary of everything that we talked about here. When you're looking at headlines or listening to news, media and things like that, just so you understand where things are and how often they happen. Dips, that's a short-term drop of about 5% or less. That happens virtually every single year on record.

A correction is about 10 to 20%. Those happen less often, but still pretty common. Two out of three years, we're going to see a decline of about 10% or more. A crash or a bear market would be something closer to 20% or more. Those happen a little bit less often. That's every four to 10 years, depending on what you actually want to look at there.  But that's what you can expect when the market starts to look a little bit ugly. 

So how can you actually survive one of these things? First thing, don't look everyday.  Second, diversify yourself and don't own just one market. Third, understand your timeline. Fourth, contribute as often as you possibly can. That doesn't mean invest all of your money all at once, but just start with smaller amounts and just pick away at it and take advantage of lower prices. Five, set a crazy low buy order so you can get a psychological benefit from when the price has actually declined far enough and that way you can feel like you're taking advantage of things the most. And finally, know that you're not alone. We're all in this together as long-term investors and if you keep some of those things in mind, you should be able to be in pretty good shape and remain a long-term investor.

Thanks for listening to this episode of the Canadian Money Roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner and Registered Investment Fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.