The Canada Stock Market Index (TSX) reached an all time high of 22,213.07 in April of 2022. Right now, as I write, the TSX is at 18986.60. It is off it high by 3226.47 or 14.5%. This is a correction. It must suffer a dip of 20% or more before a bear market is declared. It is not unreasonable to imagine the TSX dropping to 17770 or even less. But even if it doesn't, this is a nasty pullback.
My portfolio is down a little more than the market. I'm down about 15% and it hurts. Downturns like this are not unexpected but that fact does not soothe the financial pain. The losses may be paper losses but the accent is on losses and not paper.
The worst part of this moment is that I did not see it coming. I thought the market had bottomed and was turning around. I bought some Telus, some TC Energy, some TD Bank and Bank of Montreal. All these recent purchases have lost money. Now, I must guard my remaining cash and dole it out carefully.
On the bright side, thanks to the crashing stock values, the yield on my RIF has grown to 5.85%. With RIFs the government sets the annual mandated withdrawal rate. This is a rate increases with each passing year. For instance, at retirement at 65 the withdrawal rate is 4%. Ten years later, at 75, the rate is 5.82%. My rather high dividend income means I will not have to sell any stock at fire-sale prices to meet the government withdrawal demands. See the withdrawal rate table here: RRIF Minimum Withdrawal.
The value of my stock holdings may be down but I feel confident that my dividend income will not shrink to anywhere near the same extent. For instance, income from the big Canadian banks should be safe. The Bank of Montreal has an impeccable dividend history. It has gone almost two hundred years with nary a dividend reduction. The TD Bank can make almost as remarkable a claim.
Hugo Ste-Marie, a strategist at Scotia Capital, wrote in a report published last Wednesday: "Despite a challenging environment, keep in mind that over the long run, dividends matter a lot, accounting for the lion’s share of equity returns."
To underline that point, the Scotia Capital report broke down the growth of a $100 investment in the Toronto Stock Exchange benchmark from 1956 to today. With dividends, it would have grown to $29,000. Without dividends, it would be only $3,600.
Dividends contributed nearly 90 per cent of total returns over the past seven decades. In other words, it pays to stay invested. Buy and hold pays over time.
Few investors know when a correction or a bear market will appear but both tend to only stay for a short, but painful, visit. The average bear market in Canada lasts just under a year. That said, a two year bear market is not unheard of. Bear markets are difficult to call and far more frequent that most investors believe.
But bear markets tend to be shorter than bull markets and not as frequent as corrections. The average bull market roars along for more than five years and can last much, much longer. A rule of thumb, based on the U.S. market, says a third of time the bear rules and two thirds of the time the bull runs free. Ride out the bear and ride the bull.
For a good take on bear markets, read the linked article from The Motley Fool: What is a Bear Market? In writing this piece, I found the following post very interesting and worth a read: Statistics and facts about the stock market in 2023.
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