Have recent market ructions left you staggering, with an urge to shout “Sulu, damage control!” like Captain Kirk after a surprise Klingon attack?
Market crashes are much like Klingon surprise attacks in that they happen in every episode, but still surprise everyone.
This episode has been especially action-packed.
In October, the Toronto Stock Exchange’s main index plunged to 40 per cent below its peak in June.
After a brief “dead-cat bounce” upwards of about 10 per cent, it has since headed even lower.
The S&P500 index of American stocks is back to where it was in 1997, meaning that the loonies stuck between your couch cushions have outperformed many investors’ portfolios for a decade (after deducting the hidden fees most investors pay to investment advisors).
Big global companies have been hit hard.
Lehman Brothers has disappeared.
General Motors totters on the edge of bankruptcy.
More than a few major corporations are close to failing the “Bud Lite” investment test made famous by Nortel in 2002. The test is whether your investment in a company did better than $1,000 invested in Bud Lite (where at least you get $50 back from the deposits when the beer is gone).
Local companies have been affected too.
Many Yukoners like to invest in companies with local operations that they know well.
This often means risky resource stocks. These can be excellent companies and good investments, but only for investors with the right risk tolerance.
Sherwood Copper, owner of the Minto mine, is down about 85 per cent from its peak. After October’s stock market carnage, North American Tungsten was down more than 90 per cent from its peak.
Your hopes of early retirement, taking a year off in Fiji or even just taking your spouse to that new restaurant in Porter Creek may have been set back years.
But Kirk is right about damage control. There is much you can do to minimize the pain and, more importantly, the likelihood of even worse damage.
As the US Navy’s useful Handbook on Damage Control puts it: “War experience has demonstrated that no matter what the list or trim, if the ship does not sink within a very few minutes after damage, there is a good chance of saving her by proper damage-control measures.”
While the handbook’s bits about fire-retardant foam and counter-flooding may not be useful to the average investor, there are some important principles of naval damage control that you can apply.
First, remain calm and assess the damage. Don’t get emotional. The year in Fiji may be gone, but, hopefully, you still have the house.
If you haven’t already, identify what your financial goals are and when you want to reach them. Then look at what’s left of your investment portfolio.
Your goals may need to change.
The next thing to think about is risk and timing. What big cash needs do you have in the coming years? Are you mid-career and can wait for the market to bounce back in a few years (hopefully)? Or do you have big cash needs coming from retirement, college tuition or something else? And if so, did you have a cash cushion or similarly safe investments tucked away to meet that need or were you overweighted in risky equities?
Secondly, now that you know how bad the damage is, sit down and make a plan.
You may want to adjust your portfolio.
While panic-selling at the bottom of the market is not the mark of successful investors, if you have big cash needs in the next year you might not want to keep your money in the risky investments that got you in trouble in the first place.
Investors who held onto General Motors when it fell from $42 to $20 also saw it fall a few months later to $3.
If your cash cushion for upcoming big-ticket items has lost its stuffing, one of your plan’s first objectives will be to refill it. After that, you can start building your investment portfolio again.
In any case, generating immediate cash may be high on your agenda.
As you plan, triage your opportunities. Focus on the big ones first.
Now is not the time to worry about switching to the cheaper brand of fruit cocktail.
There are often a number of opportunities immediately within grasp. You can raise the deductible on your car insurance, which can save hundreds of dollars a year depending on how bad a driver you are. Premium cable TV could be costing you more than $1,000 per year.
If your investment adviser has you in equity mutual funds, you are probably paying more than two per cent per year in management expenses. On a $25,000 portfolio, that’s $500 per year. If you parked the money in an index Exchange Traded Fund like State Street’s S&P500 SPDR, you would save $475 per year. Of course, that’s assuming you are still comfortable investing in equities and that your investment adviser’s mutual fund choices didn’t outperform the market by more than $500.
Driving is another big expense.
Say you live on Oak Street in Porter Creek and commute 10.3 kilometres to Main Street every day. YTG pays its workers about 61 cents per kilometre for gas, depreciation and other expenses. Assuming the boffins in YTG Finance have the numbers right, this means it costs our Porter Creek commuter about $3,000 per year getting to work.
Carpooling or even (gasp!) the bus could save big bucks.
Your credit cards are another hole beneath the waterline to focus on early.
Are you revolving $5,000 in card debt at 18 per cent interest? Switching to a credit line at the prime rate plus two per cent would save you $600 per year.
If you haven’t done this already, you should move soon since it is getting harder to get a line of credit these days.
After you’ve looked at the big items, you can look at the small stuff. Even here, things can add up. Two lattes a day at Starbucks can exceed $1,500 per year.
Finally, track your damage-control plan. Sit down again in a month and see what has been working and what hasn’t.
Your ship might take years to repair. But at least you’ll still be floating.
Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels. His most recent book Yukon River Ghost appeared in June. Full disclosure: Halliday owns some of the securities mentioned in this article. You should consult an investment professional before trading.