How to stay invested and pick up good quality companies—on the cheap

I’m sad to say there is no magic answer. It comes down to doing your homework and focusing on setting yourself up for the future. This is what will allow you to stay strong—and stay invested—in the face of all the challenges the world is facing right now. Even though markets are taking a hit, there is still no better alternative to being invested.

Ironically, while rising interest rates are a big reason so many people are pulling their money out of the markets, those same rates are not being applied to “safe” investments such as bonds, guaranteed investment certificates (GICs) and so-called “high-interest” savings accounts. These returns are still well below inflation, which is sitting at nearly 7% in Canada and more than 8% in the U.S.

For example, at the time of writing, the average yield for a 10-year bond was 3.35%, the highest five-year GIC rate is 4.85% and the best high interest savings account (HISA) is paying 1.85%. You cannot afford to sell and sit in cash because inflation will eat away at your money. This is true even though the markets are taking a hit. 

At the end of June 2022, the S&P 500 was down more than 20% from a record high at the start of 2022 and entered bear market territory. There is nowhere to hide. What I recommend is to take your pain today to set yourself up for the future. Use this opportunity to restructure and better the quality of your portfolio. 

Prepare for short-term pain and a better future

The goal is to buy companies that are leaders in their sectors, with good topline and bottom line growth, and that pay dividends, so you get paid while you wait for stock prices to rally. The leaders will snap back the quickest. 

History has shown us that markets go up over time as societies, economies and the standard of living improve. In 1970, the Dow Jones Industrial Average Index was nearly 1,000 points. Today, it’s more than 30,000 points.

That said, it’s not a straight line up. If you are buying good quality companies cheaply, you will still see down days, but you will also be positioned to fully take advantage of the next rally. And there will be a next rally. 

Why even good quality companies are taking a hit

The Bank of Canada and Federal Reserve are increasing interest rates to try and curb inflation. Gas prices are through the roof. The war in Ukraine rages on. It should come as no surprise that consumer sentiment is at an all-time low. Investors and economists are worried we’re heading into recession. That fear is driving the sell-offs we’re seeing in the markets.