I won’t pretend that this week hasn’t been brutal. The S&P/TSX Composite dipped briefly into bear territory today when it dropped to 11,420 from its recent high of 14,329 set in April of this year. At times like these it is worth keeping in mind that we build diversified portfolios expecting that we will experience turbulent waters like the one we are currently navigating at some point in the future, although we did not know when.
Amidst all the doom and gloom, it is worth keeping in mind that well-diversified portfolios, which also have fallen in value are holding up better (depending on the actual allocation to various asset classes) due to the following reasons:
1. Bonds are doing their job of providing a ballast to the portfolio. In fact, they are doing a little bit more than that. Bond yields have fallen sharply boosting bond prices. If the stock market falls even more, some bonds can be sold to rebalance into equities.
2. We’ve discussed over and over and over again the importance of holding foreign equities without currency hedging because taking on currency risk lowers volatility. While foreign stocks have also dropped in value, the fall has been cushioned by the depreciation in the Canadian dollar primarily against the US dollar. Example: QTD VTI is down 16.4 percent in USD terms but in CAD terms the loss is 10.6 percent.
3. Surprisingly, Real Estate Income Trusts (REITs) are also holding up (at least for now). The S&P / TSX Capped REIT Index is only slightly off its recent highs. If equities drop a lot more from here and REITs drop to a lesser degree, REITs will be another source of funds for rebalancing into stocks.
