Even though the Toronto Stock Exchange has rallied some 40% off lows set back in March, the prevailing attitude surrounding the stock market is still one of major disbelief. Most investors simply aren’t convinced that this bull market is for real.
The disconnect between the stock market and the overall economy has never been bigger. Stocks are rallying despite economic data painting a completely different picture. Unemployment is still sky high, businesses are reluctant to bring back workers in case there’s a second wave of COVID-19, and consumer spending remains weak as well.
Simply put, the market is pricing in a quick recovery, something that might not happen. If economic data is just a little disappointing, the market could easily sell off sharply. Is your portfolio protected? Or are you accidentally putting yourself in a very dangerous position?
Don’t get crushed during the next bear market, whenever that might be. Use these tips to protect your portfolio, today.
Take some profits
Stocks like Shopify (TSX:SHOP) are up 100% from the bottoms set just a few months ago. That represents years worth of returns over just a couple of months.
If you were fortunate enough to buy these stocks at the bottom — or close to it — then it’s time to take some profits. There’s simply too much risk holding volatile names over the short-term.
This doesn’t mean you have to sell all your Shopify shares. Shopify is an excellent company that is easily the best growth stock on the Toronto Stock Exchange. It already dominates the e-commerce space; if you’re a small seller on the internet, you’re going to use Shopify’s software suite. It’s the best in the business. The company is expanding into other verticals such as payment processing, merchant capital, and warehousing (and Shopify has barely begun to crack those markets).
Maybe the best solution is to sell a few Shopify shares, keeping the others as a long-term hold.
Some of the best performing stocks over the last couple of months are, quite frankly, some of the crummiest. There are dozens of energy stocks that went from being sure bankruptcies to having another lease on life. These stocks are up anywhere from 100% to 400% over just a couple of months.
That kind of movement should tell investors one important thing. These volatile stocks could tank just as quickly if the market turns the other way.
The solution to this problem is easy. Instead of holding risky assets like oil, gold, or heavily-indebted stocks, investors should get a little more conservative.
There are dozens of Canadian blue-chip stocks that are trading for a nice discount even compared to a few months ago. Fortis (TSX:FTS), for example, is still down nearly 20% since the beginning of February. Canadian bank stocks are also down substantially. Residential real estate is notoriously a recession-proof business, yet many of those companies are depressed as well.
Dividend-paying securities are generally the direction you want to go here. After all, the dividend should continue, even if the market tanks again.
How about bonds?
Selling stocks in favour of buying bonds has been a staple move for nervous investors for decades. But I’m not sure I’d recommend it today.
There are already many apprehensive investors with a large bond weighting in their portfolio. This has helped suppress yields. The 10-year Government of Canada bond yields approximately 0.7% today, which isn’t a very exciting payout. Especially when you compare it to the yield offered by many conservative stocks.
I’d recommend a different strategy if you’re interested in a fixed income option. Many high-interest savings accounts pay interest in the 2% range once you consider sign-up bonuses. That beats the return offered by bonds. And, unlike bonds, which may go down in value, your principal is 100% guaranteed by a bank.
The bottom line
It’s only natural to be worried about the stock market after such a strong rally. But don’t let your nervousness get in the way of still making money. Moves to make your portfolio should be subtle, not earth-shattering.
Doing something like selling all your stock is silly. Small moves like selling a portion of your biggest winners or buying conservative blue chips are the ticket. We must ultimately remember that trying to time the market is a foolish move. The last place you want is to be hiding out in cash while the market makes a fresh move higher.