Hey, this is Thomas!
Let’s talk about what happened to the
market recently and what can we do about it?
Since the beginning of the year,
the stock market has been on a pretty bumpy ride.
No matter it’s the US market,
the Canadian market,
pretty much the drop since year to date
has wiped out all the gains from the late 2021.
Individual stock, like Shopify,
the recently crowned Canada’s
biggest publicly traded companies,
has tumbled 25% since the beginning of 2022.
Or Netflix, it’s pretty much 50% off since last year.
And the Nasdaq had its
worst week in early January since 2020.
Many people fear this is the
beginning of the bear market.
Others say it’s a good time to buy
some quality stocks at a discount rate.
what should we do then?
And can we still make a profit in 2022?
I will share my two cents about why
the market is like this and some of
the strategies to get though this wave.
Disclaimer though:
Any advice in this video is for your general information.
You should talk to the professionals about your
specific situation before making any financial decisions.
Let’s get started
As with any market volatility,
there must be more than one factor
to contribute to the roller coaster ride.
In simple terms,
I summed it up into 4 factors:
The uncertainty of COVID has of course played a part.
While the Omicron virus hasn’t
hit people as hard as other variants,
it is certainly spreading rapidly
causing concern and in some cases panic.
In addition, COVID is still causing supply chain
issues and staff shortages across the board.
Many financial analysts predicted that we
could open up the economy in Q4 last year
but with the most recent strain,
unpredictability has caused
more restrictions and uncertainty.
Many people thought
they would be travelling by this time,
but with the new variant,
many people have opted to stay home.
This hasn’t just impacted travellers.
Airlines, hotels, and resort locations thought they
would see the return of customers but instead
have had to scale back and reduce their services.
While supply is low, and demand is high.
Then the business owners will increase
their price which leads to the next factor,
Inflation
As prices rise, your dollar won’t purchase
as many goods and services as it used to.
But hey, Inflation itself is not necessarily a bad thing.
It depends on how fast and how far it rises.
On one hand,
inflation can be an indicator of a growing economy,
often translating to more jobs and rising wages.
As this occurs,
consumers have more disposable income
to spend on more goods and services.
A moderate level of inflation is
generally good for the economy,
which is why the Bank of Canada’s
target inflation rate is 2 percent.
But when inflation rises too fast,
wages don’t keep up and things cost more meaning
people spend less which can stifle economic growth.
To measure inflation Statistics Canada
uses something called the CPI Index.
CPI stands for Consumer Price Index
and it’s a way to measure the price
of everyday items over a period of time.
This way the government can track inflation
and see how it affects consumers.
These reports recently show that the CPI
increased at an annual rate of 4.8% and
grocery prices increased by 5.7%,
the biggest annual gain since 1991
according to a CBC report.
Inflation can eat away at a company’s profits as they
might have to absorb higher prices and slower sales,
less profit margin which
often causes share prices to dip.
Therefore, they will raise the price again
which leads to another inflation.
Therefore, the government has to do
something to keep the inflation in check.
Now Interest rates are one of the tools
that governments use to fight inflation.
In simple term, when interest rate increase,
the cost of borrowing will increase,
therefore the market will think twice for their action
because they have less ammo in their bank account.
And especially for tech stocks.
Because they all operate on debts,
so when interest rate increase and their
performance don’t meet the expectation.
Then pretty much it’s plummet time.
An example of this would be Netflix which has
typically earned good rates of return for its investors
but recently it has shed almost 50% of its price,
returning to its 2019 performance.
Netflix has over 15 billion in debt and almost
29 billion in liabilities as they compete against other
streaming services to make high production content.
Now, wait a minute, you’re probably thinking.
Thomas, what about growth stocks that don’t
take on a lot of debt like
Amazon, Apple, or American Express?
Why have they seen crazy market fluctuations
when they don’t have as much debt?
Well. when countries all around
the world started to print money,
we knew that inflation was coming but we
didn't expect it to catch up with us quite so quickly,
which is part of the reason why
the market has been so volatile recently.
So when you combined all the news together,
it leads the ultimate reason which is uncertainty.
At the end of the day,
the stock market doesn’t mind bad news.
What the stock market hates is uncertainty.
When things don’t meet their expectation,
the market drops
Which is fine because it can be digested.
But when you don’t know what to expect,
then it creates fear and that really causes volatility.
It’s kind of like when a wife asks a husband
what time he’ll be home for dinner.
There are only 3 scenario that can happen.
If the husband is always on time,
great every one is happy
And a worse scenario,
say dinner at 8pm, but husband came home at 9pm.
Dinner is cold and wife is upset,
but at least they can do something about it.
The worst scenario,
wife ask the husband
if he can be home for dinner at 8pm.
Husband never answer.
Being flaky about it.
And even stop replying the wife’s text.
That makes the wife worry, anxious and go nuts.
The stock market is the same.
One of the problems is the American government
has been inconsistent with its plans
causing uncertainty among investors.
Last year, The US anticipated no rate hikes in 2022
but they then changed their mind and signalled
that they could raise rates once in 2022.
Then in December,
the US government changed their mind again
and said that they would raise
the rates three times in 2022.
And therefore, a lot of investors fear
the uncertainly and pull out the funds.
Alright so more importantly,
is this really going to continue
and the beginning of the bear market?
Well, here is my other 2 cents
I called it the mom and the toddler theory.
Let’s say mom is the government
while the toddler is us, the investor.
The mom, of course,
wants to protect the toddler and ensure he
grows up strong, happy and healthy.
So, mom will do her best to create a
safe environment and maybe
constant monitoring the situation.
But in the last two years,
the toddler has been sick (COVID) and so the mom
told the toddler he can’t go out and play anymore.
He needs to be in the room and rest.
Meanwhile, the mom keeps feeding him candies
and medicine aka low-interest rate
and money being printed non stop
But now it’s 2022 and the mom thinks
the toddler should go out to the sunlight, be strong.
so she decides to cut back on the
candy and medicine (aka raising interest rates.)
Now of course, the toddler is not going to be happy
about this and kicks up a fuss but eventually,
the toddler will adjust and
go back to his old way of life.
This is kind of the stage we are in now,
the adjustment stage where we have to wean
ourselves off of government subsidy as
it seems like COVID will co exist with us.
Now can the mom make a wrong decision, maybe.
But she knows if the kid stays in the room for too
long and get spoiled with candies and medicine.
It’s going to be even worse.
And tightened up candies and medicine strategy
has happened a few times back
in the last 10 years and look at us now.
Stock market has been a historical high.
So baring unexpected world events,
a new strain of COVID or some other unknown danger,
what can we do?
In times like these,
I always like to recap the 4D principle.
The first‘ D’ is discipline:
as in remember your investment goal.
If the current investment you have is for
long term like say retirement in 20 years.
Then technically this doesn’t concern
you because you don’t need the money now.
Here is an example:
if you started investing 10,000 from
2003 to 2018 and never miss a day,
then you will make $30,000 with a 7.77% return.
But if you miss the
10 best days out of the whole 15 years,
then you will make $5000 more only with a 3% return.
And if you miss say the market 40’s best days
and you will lose money with a negative return.
That’s why I always say your time in the market
always far better than timing the market.
The second ‘D’ is diversification.
I have two ways to define this.
From a macro perspective,
is all your investment in the stock market?
Do you have emergency fund, saving account,
real estate, insurance or commodities?
Different asset classes that help you reduce your risk?
And from a micro perspective,
how diversified is your stock portfolio?
are all your stocks in one area, like tech?
OR US stocks? If they are, it’s time to diversify.
The third ‘D’ is dividend assets.
As we learned,
interest rates can hurt growth companies.
But for banks or energy companies,
they don’t hit as bad.
And they still able to yield
dividends to their shareholders.
These types of companies should not
fluctuate too much in the stock market.
And the last ‘D” is dollar-cost averaging.
Again, we don’t have the crystal ball,
we cannot predict how the market goes.
It has been proven that consistent investing over
the long term is the best way to increase
your money with a lower risk
because it’s almost impossible to
predict what the best days to invest are,
especially for the average investor who doesn’t
have the technology or the information
that large hedge funds use for their clients.
So be consistent and invest
the same amount of money,
like an automatic deposit every month or bi weekly.
That way, when market is low,
you will able to capture more unit,
and when market is up,
the unit you have will worth more.
Let’s be honest, 2022 had a rough start.
But it doesn’t mean we should just live in fear.
Focus on your strategy,
avoid unnecessary social media post and maintain
a good health so we can remove the fogs and mirror
to enjoy the opportunities that comes after the wave!
Alright, Thanks for watching and as I stated before,
this is just my 2 cents,
make sure you think it through or
talk to a profession before you take action.
And don’t forget to hit the like button
if you found value in this!
This is Thomas and I will see you in the next video!