When volatility scares you: Is it time for investors to buy or sell?

Jonathan Chevreau | January 26, 2016

If investors really believed the old axiom that they should sell when others are greedy and buy when everyone is fearful, then today’s CIBC World Markets report on record cash levels should be all the motivation necessary to start putting money to work in the Canadian stock market.

The fact that it’s also RRSP and TFSA season should be added impetus. Much better to be adding to stock positions when they’re having a “20 per cent off sale,” which is the case in most markets around the world. Canada has been particularly hard hit by the twin scourge of plunging oil prices and the sagging loonie, and by the fact that two of its three largest sectors are resources and materials.

CIBC notes that the “ocean of fear” coursing through global financial markets has caused Canadians to sit on a record cash pile of $75 billion, cash that has been steadily building up since the 2008 financial crisis. It’s been termed “the largest hoarding of cash in Canadian history.”

CIBC economists Benjamin Tal and Royce Mendes warn that sitting on too-high levels of cash for too long will mean billions of dollars in lost investment returns. They do concede that in the short term cash can guard against short-term spikes in volatility, but add “it’s certainly a long-term drag on portfolio returns.”

I wouldn’t go so far as to say cash is trash. As we noted last week, if you’re in the Retirement Risk Zone, a healthy allocation to cash and bonds is always prudent, especially for registered accounts.

Even so, once you consider inflation and taxes, the real returns from bank accounts or money market funds can be considered zero, if not negative. Even two-year GICs are paying in most cases well under 2 per cent.

Compare that to most Canadian bank stocks, which are yielding anywhere from 4 per cent to 6 per cent (CIBC is around 5 per cent and National Bank is about 6 per cent). Norman Rothery, publisher of StingyInvestor.com, says any of the big six banks are providing potentially good value at these levels, “provided the real estate market doesn’t crack.”

Now that we’re officially in a bear market, the urge should be to buy not to sell, Rothery adds. “Most would do well to be adding a bit of money or rebalancing from cash.” That’s what he’s been doing personally. Apart from the banks, he notes that Canadian telecom stocks are paying dividends that are also much better than cash, and which are tax-advantaged to boot in non-registered portfolios. BCE has been yielding 4.7 per cent recently, while Rogers is just a tad under 4 per cent. But Rothery is still shying away from domestic energy stocks, which in any case have “never been at the top end of the dividend scale.”

For younger investors far from retirement, I have to ask the question “What are you waiting for?” If volatility still scares you, try the low-volatility ETF I mentioned in this space in my first TFSA blog of the new year: the BMO Low-Volatility ETF (ZLB/TSX). You don’t have to commit all your cash at once but it’s certainly time to start nibbling at it or some of the individual (40) holdings that make up the fund.

Illustration by Chloe Cushman/National Post

Jonathan Chevreau founded the Financial Independence Hub and can be reached at jonathan@findependencehub.com


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