Is there a correction in the near future?

The simple answer is "No one knows."

That said, the market is on a bit of a tear. It has been in bull market mode beginning back in October 2022. It gained more than 17% in 2024 alone and there is still a month and a half left before the new year.

Considering that the average TSX bull market lasts about five years and nine months, there is reason to hope that the run will continue. On the other hand, a three year bull run would not raise eyebrows. It happens.

The last correction, a pullback greater than 10%, was in 2022 when the TSX declined about 17%, starting in April of 2022 and ending with the start of the present bull market. We never did see the bear. I, and many others, define a bear market as a decline of 20% or more.

Among the analysts that I follow, the present gains are forecast to continue, but I would not bank on this. Analysts are often wrong. I am concerned. Donald Trump may be good the the American market but I fear his presidency might be a disaster for Canada and the Canadian market.

For this reason, I have been hedging my bets. I now have about 14% of my retirement portfolio in a money market fund paying 3.3% interest. I expect this yield to fall when the Bank of Canada announces the next rate reduction.

Diversity is the name of the game here. I do not want to miss the gains of the bull market but I do not want to be caught without cash to buy the bargains if there is a correction. Stocks that are up so much that their dividend yield in now well below four percent are on my stocks-to-sell short list. I will take some of my profits off the table while retaining a very good, but not great, positive cash flow. I can survive nicely on the remaining dividend and interest payments.

I'm told that this is not a bear market; oh?

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.

TC Energy (TRP) In my book, today this is a buy.

TC Energy (TRP) is flirting with its low for the past year. Also, it is off its high for the past year by about 25%. This puts the stock well into bear territory. I believe TC Energy is a solid company paying a dividend that a retiree can trust -- a dividend yielding more than 7% today.

Can TRP go deeper into bear territory? Sure. But, I don't see it losing any amount that I would find frightening. It has absorbed some big losses already. I cannot see more of the same happening in the near future.

Moments ago, I put my money where my mouth is; I added to my TRP position. I look forward to my first dividend in a little more than three months. My retirement income has taken a $744 pop with this purchase.

Risk free comes at a price

If you want a risk free investment, buy a GIC. You may only make 3.5% on a four year term but at maturity all your investment will be returned. Oh, it may have lost buying power if inflation runs at more than 3.5% but you will get all your money back. Guaranteed.

 

If 3.5% is not enough yield, why not take on a little risk and put 2% of your portfolio in IGM stock. IGM is off its recent high by 21.2%. It is selling for $40.71. A price that puts it in bear territory. Buying today, you will enjoy a dividend income of 5.53% for the next four years. That much is pretty much guaranteed. IGM is not overly generous with its dividend. Its payout ratio is quite reasonable. The dividend should be secure.

Morningstar lists IGM on both its Canada Core Pick List and its Canada Income Pick List. Only eight stocks receive this buy recommendation in the recent monthly report. At the moment, Morningstar gives IGM four stars. This means Morningstar believes IGM will most likely reward investors with capital gain.

During the March 2020 bear market, IGM dropped in price to about $21. Clearly, the IGM price can fall a lot more. A paper loss is possible. On the bright side, it climbed out of the depths of the 2020 bear market in little more than a year. If you can afford to hold, its price should recover. (IGM was selling for $43.20 at market close Mar. 7th, 2023.)

My take

I ended up buying some REITs wrapped up in the ETF RIT. I the units were $17.95 with a yield of 4.5%. These units partially replaced the units of XRE that I sold at the beginning of the recent correction. I sold the XRE high and I bought the RIT at a much lower entry price point.

One thing you never get with a GIC is a profit surprise and with a yield of only 3.5% you are hardly being paid to be patient or otherwise.

Make a note to yourself and revisit this advice in four years. See if I was right when I pronounced RIT or even IGM a better investment than a GIC. With a GIC you have almost locked in a guaranteed loss. With RIT or IGM, but especially RIT, I like to think I am risking making a tidy capital gain and banking a generous dividend. That is a risk with which I can live.