When the market is dropping, cash is king. It is our best protection against market drops. In our core portfolio, we maintain our 50/50 personal personal asset allocation with 50% being invested in SPY and 50% being held in a TD US Money Market Fund (TDB166). TDB166 is the equivalent of cash, but it pays interest, currently at 1.9%.
Here is how things look now. (All charts are from TD WebBroker.) The purple line with the large dots represents our core portfolio, the red dots, the S&P 500 and the blue dashes, the Toronto Stock Exchange index (TSX). Concerning the TSX, well, read it and weep. It has been below the S&P 500 for most of the last decade, at this point.
Last three months:
Last twelve months:
Year-to-date. Because 11 months of the year-to-date have passed, the chart looks like the one above showing the last 12 months.
Let us review the habits of highly effective investors.
- Having an early, disciplined savings program
- Self-directed (do-it-yourself) investing
- Buying the entire U.S. market
- Buying and holding
- Buying low, selling high
- Avoiding complexity
The S&P 500 has entered correction territory. (A drop of 10% percent.) Many investors consider this a good time to re-balance their portfolios to their preferred asset allocation and go to habit 5. and buy low.
Younger and more risk-tolerant investors could consider going to the variable asset allocation method by moving a third of their cash into the broad-based index ETF of their choice. When the market begins to recover, they can rebalance to bring their portfolio into their personally selected asset allocation.
Loss-taking amateurs are exiting the market, as usual, during market drops. Successful investors love the bargain which the current market represents.