Finance Acknowledge mistakes and clean up your messes when they happen A bear market is no time to stubbornly hang on to investments that haven’t been working out. During volatile times, when downward price movements can continue to pressure even the best investments, it’s usually far better to acknowledge mistakes, sell your losers and reallocate the proceeds to better ideas, than to hope and pray that one day they will “come back.” Take a moment now to identify some of the “problem” investments in your portfolio. Are there positions that have demonstrated consistently poor performance? Stocks for which the management or the business fundamentals have radically deteriorated? Ideas that you just don’t feel comfortable with anymore – the risks that keep you up at night? If you’ve invested in new ideas that haven’t worked out as you planned, it’s a good idea to clean up the mess now and move on to new opportunities. One strategy that can take the sting out of investment mistakes is the ability to claim capital losses: generally, any losses which you take in a non-registered account can be used to offset capital gains taxes on profits that you expect to make in the future (or, in some cases, offset gains which you’ve already made in the previous three years). Doing so requires some detailed knowledge of tax law, however, so make sure to seek advice from a qualified accountant, tax lawyer or other knowledgeable professional before you make any move. Use the bear market to build income A bear market can be an excellent time to build the income side of your portfolio. By buying income-generating assets now – when prices are considerably lower (and yields considerably higher) – you create a solid foundation of steady income that can hold you in good stead throughout the future. In the current environment, several sources of investment income look increasingly attractive: Government bonds – up until this year, the extremely low yields offered on ultra-secure government bonds made them rather unappealing to those trying to generate income. The recent run-up in interest rates has changed that calculus dramatically. If you’re a conservative, income-oriented investor more concerned with security of capital than with capital appreciation, now may be the time to take a closer look at building a bond ladder, or putting some money into bond-oriented ETFs and mutual funds. Dividend stocks – the share prices of many wellestablished, blue-chip companies have come down considerably since the start of the year. If you’re a more balanced investor who’s looking for both reliable income and some capital appreciation, it’s a great time to go shopping for solid, dividend-paying stocks in sectors such as banks, health care and consumer staples. An added bonus: although their prices can still be more volatile than bonds, the stocks of dividend-producing companies should hold up a little better if the bear market continues, if history is any guide. Real Estate Investment Trusts (REITs) – REITs are an asset class that has been hit hard by rising interest rates and slowing economic activity this year. But by now, there’s an argument to be made that much of the bad news has been priced in: with unit prices substantially down from the start of the year, it might be a good time for risk-tolerant income investors to start bargain hunting in the sector. Be aware, however, that behind every REIT is a business – and the quality of that business makes a big difference to how volatile the unit prices will be. So, make sure to do your due diligence and research any REIT which you’re considering thoroughly before you buy. If you lack the time or the knowledge or the inclination to do that, stick to well-diversified, professionally managed mutual funds and ETFs. Keep in mind that there’s nothing stopping you from choosing “all of the above” when it comes to building an income portfolio. In fact, most snowbirds would be well-served by diversifying their income portfolios across all of the above asset classes. 42 | www.snowbirds.org
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