Sell-offs always set the stage for recovery,

although it’s hard to think good times won’t return

Human nature tends to work against us when the stock markets turn.

Now is one of those times, particularly for readers who have turned to stocks reluctantly as the only way to stay ahead of inflation. As share prices have moved wildly and largely lower this year, concern has mounted. Some think they should sell now, which may be the worst time to do it.

Wednesday, the U.S. Federal Reserve raised interest rates for the first time in nearly a decade, and the news offered another example of a day of lurches. North American stocks sank before the announcement, then soared once the hike was official. Both Toronto and New York ended the day with triple-digit gains.

The last two trading days aside, it’s been a lousy year for investors. The main index on the Toronto Stock Exchange is down 10.7 per cent on the year as of Wednesday’s close, largely because of the commodity and energy rout, which hurts many areas of our economy. The Dow Jones has fared better, but is still down a little less than half of 1 per cent.

Toronto reader P.N. has had a small portfolio of stocks for 30 years. She wanted a higher return without too much more risk, so her adviser put her into a portfolio of dividend stocks.

She doesn’t need the quarterly dividends for day-to-day living, so instead of cash she opted for a dividend reinvestment plan (DRIP), which adds the equivalent of the dividends as shares. But as the face value of her holdings has fallen, she wonders whether it’s smarter to take the money.

“With the erosion of the stock market, I admit to feeling some anxiety,” she wrote. “I feel I should stop the DRIP method and receive the dividends in cash.”

After some to and fro, P.N. has decided to stand pat, reasoning that her DRIPs buy more shares as the stock price falls. And given the high quality of her holdings, the companies she owns will fall least and rebound first. They will also pay dividends along the way, so there’s no reason to sell.

Her thinking is similar to Brampton reader S.W., who has watched his portfolio shrink almost 10 per cent in the last few months, losing $107,000 on paper, he says.

His holdings are also top-quality. They include large real estate investment trusts and preferred shares of Canada’s banks. All pay monthly or quarterly dividends. S.W. wanted to know whether he should hang on. He uses the dividend income to live on, but does not need to touch his seven-figure capital. He has also decided there’s nothing to be gained by selling and believes his holdings will rebound.

Diversification and investment quality are the keys to long-run investment success and if you have both you’ll come out ahead. But we live in the short run, where emotions are always at play.

Bernard Baruch, a Wall St. financier and adviser to five U.S. presidents, once noted that emotions constantly set traps for our reasoning powers. We tend to react to the urgency of today’s news and lose sight of our goals. Here are a few things to keep in mind: Stocks can seem risk-free for long periods, but they aren’t. When they fall, it can be a rude shock for those who are in the markets as a last resort. If you need to preserve capital, you shouldn’t be there. If you can accept some risk, high-quality funds and shares offer a higher return.

Market sell-offs always set the stage for recovery, although as Baruch observed, it’s human nature during bad times to think the good times will never return.

On Black Monday in October 1987, U.S. shares fell 22 per cent in one day. They recovered all of that in a few months. Crashes in 2000 and 2008 were all followed by big rebounds.

Lower share prices mean a higher dividend yield. For example, shares of TransCanada Corp. tumbled following the U.S. rejection of its Keystone pipeline. A year ago, the shares were worth $52.83 with a dividend yield of 3.6 per cent. The shares closed at $48.30 Wednesday with the dividend yielding 4.3 per cent. On top of that, TransCanada raised its dividend this year, a sign of confidence in its outlook.

This is not to say that sell-offs don’t hurt. It’s just that if can look beyond them you often find that better things lie ahead. Adam Mayers writes about investing and personal finance

USA Interest Rate Bump Up - Helps Canada

Confident American consumers, low-flying loonie could bring prosperity north of the border when Fed raises benchmark rate

Never has so much attention been paid by so many to something so small.

With apologies to Winston Churchill and his Battle of Britain speech, the greatest American economic experiment in the post-Second World War period will probably end Wednesday.

It’s been a battle of another sort, as the U.S. Federal Reserve ends its zero-interest policy, letting a key rate rise by as much as a quarter of a point. It would be the first increase there in almost a decade.

The increase isn’t much; more important is that it signals a swing toward normal conditions. And it is actually good news for Canadians.

The Fed pushed rates down sharply in 2008 to stave off a financial collapse, creating trillions of dollars out of thin air. That did the trick, encouraging consumers to borrow and spend. It brought U.S. housing back from the brink and has pumped up stock prices.

It’s no accident that a decision to raise rates is being made nine days before Christmas, when the financial world is winding down for the two-week holiday period. Nobody is quite sure how this will play out; stock markets have been behaving erratically at the thought. A rate hike may mean more lurches, or the bump may already be factored into prices. Nobody knows. So all the better to make a move when attention is focused elsewhere.

With the U.S. still our biggest trading partner, here is how their decision could bring energy here: Energizer No. 1: Confident Americans The move signals that the U.S. economy is humming after seven lean years. Consumers account for the bulk of American economic activity, and they are back in a big way. Their economy is creating jobs and the unemployment rate has fallen to 5 per cent, which is considered full employment. Wages are rising and wallets are open.

These forces usually create inflation, and policy-makers want to act sooner rather than later to stop it from building.

Our economy tags along. Demand rises for everything we sell to the U.S., from energy and resources to manufactured products. One sign of the good times this year is car sales. They’ll set a record in the U.S., exceeding a high set 15 years ago in 2000, according to Automotive News. Many of the cars Americans drive are made in Ontario: Oshawa, Brampton, Cambridge, Woodstock or Alliston.

Autos are just one sign of the times. Scotiabank economist Aron Gampel said in a recent briefing that Canadian exports have increased at a 9-per-cent annualized rate since February. Expect more momentum in 2016. Energizer No. 2: A 70-cent dollar Our dollar ranks among the worstperforming major currencies against the greenback in the past year. Canada and Australia have seen their currencies fall by about 25 per cent and 30 per cent respectively against the U.S. currency. Both of those countries are huge exporters of energy and minerals.

This week’s 72.5-cent (U.S.) level for the loonie is an 11 1⁄ 2- year low. That may seem awful, but more may be in store, CIBC economist Avery Shenfeld says. In an interview with the Star last week, he said, “I think a 70-cent Canadian dollar is now in sight.”

That’s bad news for those heading to Florida or the Caribbean, where things are priced in U.S. funds. Mexico may be a better deal this year.

But a weaker dollar is more fuel for our economy. This is especially true in industries that are exchange-rate sensitive. Beyond cars, this includes industrial machinery, electronics, aircraft and consumer goods. Energizer No. 3: Low inflation If these changes can come without inflation, as during the days of the 66-cent dollar in 2000, that’s a third boost. Meanwhile, the slide we’re seeing in energy prices helps us — it’s effectively a tax cut, making it cheaper to heat, drive and manufacture. Inflation held steady at 1 per cent in October and our central bank has made it clear things aren’t going up any time soon in Canada.

The one inflationary worry is that rock-bottom interest rates are fuelling an unhealthy housing market in the GTA and Vancouver. Mindful of that, federal Finance Minister Bill Morneau on Friday tightened the minimum downpayment for high-end homes from 5 per cent to 10 per cent.

If the Fed raises its rate, it will be a small move with a big implication. For us, long-term gains may well outweigh short-term pain.  

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