I received an e-mail from a young reader last week: “How do you believe the current state of the market would affect someone looking to purchase long-term securities? I have some extra money I’m looking to invest and not touch for the long term. Would now be a good time to buy at a discount? Or would you advise waiting?”
Good questions – and well-timed. Monday, Aug. 5, was a terrible day for stock markets. The tech sector was ravaged as three separate bombs exploded at the same time: the popping of the AI bubble, the sudden fear of a U.S. recession and a landmark antitrust ruling against Alphabet Inc.’s Google Inc. search engine domination.
The carnage among the Magnificent Seven, which had been leading the markets higher all year, was brutal. Microsoft lost US$13.34. Meta Platforms fell US$12.41. Apple dropped US$10.59 after it was announced that Berkshire Hathaway had sold half its position. Tesla Inc. gave back US$8.79. Alphabet tumbled US$7.42. Amazon.com Inc. was down US$6.88. Nvidia Corp. lost US$6.82.
The tech-heavy Nasdaq lost 576 points (3.43 per cent). The S&P 500 was down 160 points (3 per cent). The Dow lost just over 1,000 points (2.6 per cent).
Although information technology bore the brunt of the selloff, the effects were felt across all sectors. Even the bond market took a hit.
The consensus among analysts was that this was a plain, old-fashioned correction. The rally that followed seemed to confirm that. But it should be noted that even with the big rebound, the S&P 500 still ended the week slightly down and well off its all-time high of 5,669.67, reached in mid-July.
The point is that day-to-day movements don’t mean a lot, dramatic though they may be. What’s important is the mid- to long-range trend pattern. The S&P chart had been rising since October, 2023, and set a new record in July. Despite rallies, some of which were significant, the downward pattern since is clear.
Does this mean a bear market is looming? Possibly. We’ve seen what’s happened to technology in recent weeks. Commodities have also been weak as demand has slowed for key metals such as copper. Jobs have become hard to find, especially for young people, indicating a slowing economy. We may yet have the proverbially soft landing, but a hard one – a recession – can’t be ruled out.
So, back to the young reader’s questions. History has shown that no one is able to successfully time the markets for an extended period. Storms sometimes appear in cloudless skies, catching investors by surprise and breeding panic. At the other extreme, huge market rallies usually start when everyone has lost hope. Despondency spawns success.
So here’s what I advise.
1. Use a dollar cost averaging approach. Invest one-third of the money now. Keep the rest in a high-interest savings account.
2. Invest another third in October and the balance in December. This will smooth the peaks and valleys of market movements between now and year-end.
3. You probably don’t have a lot of money to invest, so don’t try to pick individual stocks at this stage. Stick with index ETFs, which are cheap to own and provide broad diversification. Here are updates on the ones I recommend.
iShares Core S&P U.S. Total Market ETF
Originally recommended March 2, 2015, at $20.22. Closed Friday at $53.99.
Ticker: XUU-T
Background: This ETF tracks the entire U.S. market, including small-, medium- and large-cap stocks. It comes in both a hedged version (XUH-T) and an unhedged version (XUU). We recommend XUU.
Performance: Despite last Monday’s market plunge, the fund is ahead 15.8 per cent year-to-date. To July 31, the five-year average annual compound rate of return is 15.13 per cent. The fund is vulnerable in down markets – it lost more than 13 per cent in 2022 – but over the long term that was merely a blip.
Key metrics: The fund was launched in February, 2015, and has $2.9-billion in assets under management. The MER is a very low 0.07 per cent, so almost all your money is working for you.
Portfolio: This is a fund of funds. It invests in four U.S. ETFs, the largest of which are the iShares Core S&P 500 (47.53 per cent of total assets) and the iShares Core S&P Total U.S. Stock (46.06 per cent). The rest of the portfolio consists of small positions in small- and mid-cap ETFs and a limited amount of cash.
In sector terms, the fund has a 28.84-per-cent exposure to information technology. Other large positions are financials (13.52 per cent), health care (12.05 per cent) and consumer discretionary (9.77 per cent). The sector breakdown has remained reasonably consistent for several years.
Distributions: Payments are made quarterly and may vary considerably. Over the past 12 months, distributions have totalled about 58 cents per unit, for a trailing yield of 1.1 per cent at the current price. This is not a fund to own if you need steady cash flow, but for long-term growth it works fine.
Outlook: This is an all-stock ETF, so returns will reflect what is happening in the U.S. equity markets. Right now, the outlook can only be described as uncertain. Long-term, this is a core holding for anyone who wants exposure to the broad U.S. market.
Action now: Buy for long-term growth.
iShares Core S&P/TSX Capped Composite Index ETF
Originally recommended March 2, 2015, at $19.58. Closed Friday at $35.61.
Ticker: XIC-T
Background: This fund is designed to replicate the performance of the Capped S&P/TSX Composite Index, net of expenses. In other words, it invests in a broad portfolio of Canadian stocks.
Performance: The fund touched an all-time high of $37.03 in late July but pulled back after the TSX suffered a big drop on Aug. 6. It’s ahead about 8 per cent year-to-date.
Key metrics: The fund was launched in February, 2001, and has $12.6-billion in assets under management. The management expense ratio is very low at 0.06 per cent.
Portfolio: The fund holds 227 positions. Royal Bank of Canada is No. 1 at 6.62 per cent of the assets. The other top five holdings are Toronto-Dominion Bank (4.32 per cent), Shopify Inc. (3.57 per cent), Enbridge Inc. (3.55 per cent) and Canadian Natural Resources Ltd. (3.18 per cent).
Financials at 30.65 per cent are the top sector in the portfolio, followed by energy (17.64 per cent), industrials (13.53 per cent) and materials (11.9 per cent).
Distributions: Payments are made quarterly. The most recent distribution, in June, was 26.6 cents per unit. Over the past year, distributions have totalled 98.1 cents per unit, for a trailing yield of 2.8 per cent.
Outlook: As with all these recommended funds, the short-term outlook is uncertain, but long-term this ETF is a good choice for a diversified position in the broad Canadian economy.
Action now: Buy.
iShares MSCI EAFE Index (CAD-Hedged)
Originally recommended March 18, 2013, at $19.68. Closed Friday at $34.80.
Ticker: XIN-T
Background: This ETF is the Canadian dollar hedged version of a U.S. fund (EFA-N) that tracks the MSCI EAFE Index. That index covers Europe, Australasia and the Far East. Most of the assets are invested in the U.S. version of this ETF.
Performance: The fund is having a decent year, up 7.27 per cent to date. That’s close to its 10-year average annual compound rate of return of 7.83 per cent.
Key metrics: The fund was launched in September, 2001, and has about $1.3-billion in assets under management. The MER is 0.51 per cent.
Portfolio: This ETF is highly diversified, with 744 underlying positions, and is more or less equally weighted. Japanese stocks make up about 22 per cent of the assets, with about 15 per cent in the U.K.
Distributions: They are paid semi-annually, in June and December. The June payment this year was $0.526 per unit.
Outlook: Again, uncertain short-term, positive long-term.
Action now: Buy for long-term growth.
Finally, in terms of mix, I suggest our young reader invest 60 per cent in XUU, 30 per cent in XIC and 10 per cent in XIN.
Gordon Pape is the editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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