Jordan emailed me an interesting question regarding giving advice during a bear market that really hit home for me.

What do you say to someone who has completely lost faith in this falling
market? If they’ve lost their ever loving minds and now think there will be
bank runs, CDIC insurance won’t work, and they are too scared to invest in
anything with any amount of risk.

Do you try to help out your family/friends or keep your investment
knowledge to yourself to avoid possible blow back?

My rule of thumb is to never give advice unless it is asked for.  So even in the scenario of a family member/friend losing all faith in the markets, it is probably due to losing a bunch of money in equities over the past year.  The last thing they want to hear is someone telling them what to do after the fact.

However, if I was asked what I thought of the current market crash, I would tell them what I’ve been writing about here.  That is, although this may be a significant market correction, the markets will recover.  Every major bear market in the past felt like the end of the world, but the markets have always bounced back.  So if you’re invested for the long term, I personally would hang tight, and even consider buying when opportunities present itself.

In addition, this market is a true gut check for new and seasoned investors alike.  Market conditions like these reveal your real risk tolerance.  If the current volatility of the markets is causing you to lose sleep, then it’s time to review your equity/bond asset allocation and adjust accordingly.

So that’s what I would do in this situation.  What would you do?

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I agree with you; never tell people why they lost money and how they should have invested ;-)

I suggest people to do a research on previous headlines while other crisis. You will notice that newspaper are announcing the end of the world every decade or so. Same headlines, sames big titles, sames pictures of people losing jobs…

At this point, you basically have 2 options:

1- grab your teeth and go through the storm because good companies will always exist and will make the markets go up at one point.

2- leave the market, cash your loss, go into fixed income and never come back to the market. I tell my client that if they want to leave the market, it’s fine. HOWEVER, if you go into fixed income after cashing your loss, you must know that you will take most likely 10 years to get your capital back AND to not invest in 3 years when everybody else is making 15%.

This is the sad part about some investors. They sell in these situations to go in fixed income, wait a few years and once everybody is in the market and making 15%, they jump into the drain just before it falls again…

There is nothing wrong to cash in your loss because you don’t sleep anymore. However, you must know that the market will go up again some day. Market is the extension of companies. If the market goes at 0, this means that all companies in the world (except private small companies) are bankdrupt. This means, no product, no jobs, no stock market. Do you really think it can happen?

Thanks for answering my question. For most people I generally wouldn’t go out and offer my advise either, but I’ve been caught up into this one because it’s my parents.

The situation is much like you thought, they’ve lost a lot of money in the downturn because they had too much risk and market exposure. They left all of the financial decisions to their advisor.

The bad news is they’ve just been retired for a couple years, so this has been a shell shocker and also means they won’t have much new income to make this a buying opportunity. They sold out and took the lose because they couldn’t bear losing any more, I think it felt out of control to them.

I have suggested they now have to be involved in their investments, that it’s their new job. To start with they need to read some books (and maybe blogs) so they can make educated decisions going forward. That hopefully understanding is the answer to their fear.

Is this happening to anyone else’s families?

I wonder how many people in this market are able to stick with option 1, especially in their situation.

If they are able to stick it out, and given their nature to overact to loses do you think it makes more sense to suggest they change their investments to an asset allocation of about 80% bonds and 20% in diversified indexes or a dividend based portfolio which might have a better yield but more volatility?


actually, even if they are retired (unless they are 70+), they will probably live more than 20 years. This means that they have a lot of time in front of them to recuperate from their loss.

in addition to that, they should not be withdrawing more than 5-6% of their capital per year. This means that, at the end of the year, they still have 95% of their initial capital invested in the market.

This is really a matter of sleeping or not. However, if you do the math, someone who lost 15% will take about 10 years or so to only get back his original capital (not counting inflation) with a 4% GIC… does it worth it?

Jordan, it’s tough to know what a perfect allocation for your parents is.

My two thoughts:

1) Education – as FB said, if you know about previous bubbles, crashes etc it makes it a lot easier to weather the ups and downs. The history section of Four Pillars of Investing is excellent for this.

2) Regardless of #1 – Bernstein (Four Pillars author) says that the most important factor with an asset allocation choice is to be able to stick with it. He recommends as high as 75% equities for everyone but he also says that there is no point in having any equities if you end up selling low (now) and then buying high.

It’s not too late for your parents – if you can talk them into a 20 or 30% equity allocation then you will be doing them a favour. If that is all the equities they can handle, then that is the best allocation for them.


I think this has been a good education for myself. In the future, I won’t be as giddy with paper gains and will move to restructure my investments to protect myself more from an inevitable downturn. At this point, I would want to stay with, and add to, an equity position.

The problem with giving advice even when asked is that you don’t really know the person who is asking for advice. Even if you ask yourself what you are prepared to live with, going through the events that we have probably caused people to feel differently than how they would have expected.

It is easy to say that one could be comfortable with 30% up years and 20% down years as long as the overall gain was 10%/year. But, experiencing these dramatic drops is real vs. a theoritical question on a piece of paper.

So many people I talked to recently are only in the first phase of the 5 stages of grief. The stages are:

1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance

They have stopped opening their statements and don’t want to know what is going on. I’m somewhere between 4 and 5 and that is probably more to do with the timing of buying these stocks. When you buy a stock that has gone down 50% from its 52 week high and near its 52 week low, you “think” you are getting it at a good price. But, then they start reporting earnings and the stock tanks another 30% in just a few weeks and it feels like you are an idiot. Yet, I keep watching the finance channels and the experts aren’t any better at figuring out where things are going. However, if you take the tack that if you don’t know it is better to sit on the sidelines until more facts are known, you may be able to sleep better and come out further ahead.

Alot of the decision on what to do next depends on whether you believe the markets have hit their bottom. I’m expecting a low for the TSX in the 4000s which may seem remarkable but I have my reasons (think deleveraging + nasty recession.) Given that scenario it makes sense to sell even at these prices. I’d start buying back in the low 5000s and dollar cost average at that point, not now. High interest savings accounts or GICs are the place to park money for now. Do not buy bonds. The crappy yields now mean they are not worthwhile and high inflation later will devastate them.

The truth is that noone knows what will happen next in the markets. It’s true that you could cash out now and earn 4%-6% annually in fixed income. But what would happen if the government money presses around the world create double digit inflation? Your fixed income investments would still go up in value.. But the actual value of your money would be lower..

That’s why I believe that a good portfolio should have assets that could increase your performance in certain market conditions. A simple stock/bond allocation be it 50/50 or 75/25 should do the trick for most retirees.

I am on the same page as FT- whenever my dividend/interest incomes are higher by 1.5 times the annual expenses, then you could consider yourself able to retire. But of course i have several decades untill then..

Most of my dividend growth stocks have kept increasing their dividends in 2008.. Some have decided to keep it unchanged, while a couple of stocks in certain sectors affected by the housing bust like financials have cut their distributions..

While I try to avoid providing specific advice on where family or friends should invest, I do usually provide them with resources that will help them find out their answers.

Many of my conversations recently have been on the topic of investment risk & helping others determine what sort of risk they “really” can tolerate. Its easy in a bull market to say that your investment risk is “x” but it takes a bear market to give you a reality check and demonstrate how much risk you’re really willing to tolerate. There’s no replacement for taking the time to learn to invest because very few people can make a lot of money over a short period of time.

I think providing an individual investor with the proper resources & then helping them answer further questions is the best course. This way the investor already has in their mind an opinion or insight that you can help to clarify rather than influence.

I would recommend people to start up or increase the amount of money they put into their emergency fund. I would also recommend to people who our taking the risk of investing in this violate market to invest in recession proof stocks with high dividends and yields.

After 8 disastrous years in mutuals I pulled all my money out and put it in flexible GICs at 2.5 and 2.9%. Not a great return but a helluva lot better than watching my hard earned money continue to dwindle into nothing. I have a low tolerance for risk, apparently.

Another tip – do not let the parents read anything by Garth Turner it will scare them into buying generators and shotguns.

I don’t know what Garth Turner says on investing or the economy, but I strongly agree with him that the housing market in Vancouver is going to pop, big time.

Good advice all round. I’m holding on to my investments, and I don’t check the account statements. ;o) If any extra money comes my way, I’ll add to them.

If we had needed the money in any immediate future, I wouldn’t have been so heavily invested in equities.

“I don’t know what Garth Turner says on investing or the economy, but I strongly agree with him that the housing market in Vancouver is going to pop, big time.”…

10-15%, in the next few years, maybe. 20-30% like our neighbors down south in the next few years? IMO, no. Macro considerations (Olympics, foreign money, coast/port city fundamentals, high standards of living, general lower credit leverage, etc.) should keep the economy buoyant for the next few years until the global economy gets through this funk and hard assets, like homes, begin to re-inflate. Bubbles tend to burst due to distressed selling. If people with homes don’t have to sell, in a depressed market, they simply won’t.

@Gael you have a very low tolerance for risk. At current inflation rates, you’re gaining somewhere between 0% and 0.4% in real purchasing power. So you’re effectively ensuring that you don’t lose money.

@Jordan: you’re asking a fundamentally difficult question. And based on the information you’ve given, your parents are living the results of their own decisions (which makes it really tough to provide love, support and guidance without saying “I could have told you”).

If I had to give advice, it would be simple:
#1: don’t panic
#2: evaluate your goals and ensure that you’re meeting them

I want to be very clear, even this board is filled with knee-jerk reactions and information that needs to be digested very carefully. DGI talks about stock / bond ratios, but it’s clear that he’s actually investing in stocks for the Dividends. It’s easy for him to advise 75 / 25 b/c he doesn’t really care that much about stock price only about the value of the share relative to the dividend and the continued viability of that dividend.

@Donny Gamble has some shaky advice: I would recommend people to start up or increase the amount of money they put into their emergency fund.

Unless you feel that your risks of an emergency have increased, there’s obviously no reason to lose more money by putting it in a savings account.

I would also recommend to people who our taking the risk of investing in this violate market to invest in recession proof stocks with high dividends and yields.

Hollow advice, he’s basically saying that you invest in companies that aren’t losing money and that are somehow “recession-proof”. Is that different from “inflation-proof”? Are gold and oil “recession-proof”?

@Al is suggesting some good old-fashioned market timing, which is effectively what your parents are doing now.

and as mentions, a bunch of market gurus are still suggesting 50/50 splits which is foolish unless you’re treating the money like DGI or FT are suggesting.

Look, your parents probably don’t want to hear this right now. But I’ve been saying this for months. If a crashing market is rendering your retirement plan insolvent, then it wasn’t much of a plan to start with.

You are not going to make it through 20 years of retirement without some form of market crash or severe market correction. If your “retirement plan” doesn’t account for this, then you were just kind of hoping to retire. Sure they were probably mislead by an advisor, and for that I feel for them.

Without a long list of concrete numbers, it’s really hard to provide concrete advice. But in the abstract, your parents have to find a way to manage cash flow so that they can continue to enjoy life.

There are lots of options and your parents won’t like many of them. But just remember, they couldn’t weather the inevitable crash so their “plan” was more of an “optimistic projection”. Once they’ve accepted that, then they’ll be ready to accept advice and make the (inevitably) difficult decisions.

“Macro considerations (Olympics, foreign money, coast/port city fundamentals, high standards of living, general lower credit leverage, etc.) should keep the economy buoyant for the next few years until the global economy gets through this funk and hard assets”

I severely doubt it. Prices are well in a speculative bubble, not supported by underlying cash flows. Real estate investment is a microcosm of other types of investing, the advantage being it is a relatively simple investment vehicle to understand: cash flows and capital costs are reasonably well defined so you know to a reasonably accurate level its fundamental value. If you can understand that real estate investments have value only because of future cash flows from rents, you will be most of the way to understanding why Vancouver house prices will fall 30%+. As an added bonus, if you understand how this relatively straightforward market works, other more complex investments start making much more sense.

Novice, I was one of those guys who went vacationing during the dreaded Y2K… but after reading Garth Turners blog I’m almost tempted to prepare for his visions of ultimate disaster!

Garth is scary!

I think GatesVP makes a good point. Maybe not so tactfully, but how can you tactfully say “I told you so”?

I think part of the problem lies with mutual funds salespeople masquerading as financial planners/advisors/consultants. These people are compensated based on the sale of equity based funds, so they’ll naturally want to sell those products that give them the biggest paycheck… I would. There is evidence to support the over-emphasis of equity funds. A good amount of panic selling is emanating from mutual funds redemptions, which are hitting record levels.

Before one even thinks about equities vs bonds et cetera, one should write down timelines on a piece of paper. “When do I want to spend the money I’m putting away?” If that number is anything less than five years, at least for my risk tolerance, I would put approximately 0% of my hard earned cash into equities.

I think failure to consider timelines is a major fault of the planning process for most people. I know that I can weather the storm in the markets because the portion of my savings that resides in equities is not going to be sold for a good, long time.

I’ve given advice to friends and family during the last 2+ months but it was more general than specific: don’t quit your day job; get out of debt ASAP; wait until 2010 to splurge on ‘Item X’; and hang onto your hat because it’s going to get even bumpier!

I have no idea what the market or economy is going to do and I would bet most of the “pros” don’t really know either (there’s a new surprise coming out of America every day!). My answer — down even more. No idea how much or for how long, just down.

I have been telling my friends that what I am doing is not working. So don’t follow me. Value investing has been a heartbreak hotel for the last few years.

..It’s true that if there’s a large enough amount of (speculative) real estate investment, there’s a possibility the housing market could take a large tumble. To tell you the truth , I do actually know a few people in that boat. However, they still aren’t leveraged to the degree that they simply would *have* to sell in a crashing market as they bring in enough income to sit on the property and wait. Correct me if I’m wrong, but sharp real estate crashes are precipitated by sharp increases in foreclosures, yes? Since foreclosures are a option of last resort, if the economy holds up and people still have jobs,
IMO don’t see a *worst case* Phonenix/Las Vegas 30% drop on our hands.

Also, I don’t understand the comment about future cash flows from rents being the *only* value of a property. All real estate has some sort of building value (though depreciating), while detached homes/properties have a land value (long term appreciating/holding its value), yes?

To get on my soapbox for a second……I guess I’m only saying these things as the “fundamentals” of investment seem to only be the “fundamentals” because somebody of influence says they are. Our global system of (fiat) currency is flawed to begin with anyway, but hey, it’s what we’ve got. To cut a long spiel short, if enough people believe in something, they’ll probably find a way to make it happen. If enough people say “terrible housing crash”, it’ll probably happen, and really, that’s in the best interest of the minority.

A flaw in many peoples philosophy about investing is two fold:
1) The past is a valid representation of the future.
2) They only consider the positives of the past.

Approximately every 8 years we go through a recession and there have been times in the past where the market has trended sideways for over ten years (i.e. no gains).

The problem with most people’s investment philosophy is that they take the losses too personal and then make irrational decisions. I have spoken to numerous people who have taken all there retirement savings out of the market and bonds and placed it into a savings account. Other people become much more aggressive when they shouldn’t and a third group makes no changes at all.

Loosing a large percentage of your portfolio sucks but this also creates opportunities that may not have existed a year ago. As an example, BMO just issued preferred shares with a dividend of 6.5%. These pref shares with such a large dividend did not exist a year ago. Investors should also consider options (put options can be used as insurance to protect a portfolio from huge losses). These are just two examples.

Although equities have fallen almost 45% from there highs, it is still possible for the markets to decrease a significant amount from where they are today. Each person’s situation is different and it is important to evaluate your portfolio on a regular basis and make rational changes based on your situation.

@John Doe: All real estate has some sort of building value (though depreciating), while detached homes/properties have a land value (long term appreciating/holding its value), yes?

I think the answer here is kind of yes and no. Yes what you’ve said is correct and no it’s incomplete.

The house itself does have some type of value. But historically, the change in housing values has averaged the change in inflation.

Now, we’re just getting off a giant 15+ year housing run, so it’s hard to remember when housing values didn’t grow. My parents bought a house in Winnipeg for $100k in 1990. Growing at inflation that house is now worth $145k, but the market rate for houses on that block is about $270k. So not only is the house 15 years older but it’s doubled after inflation? Yeah, it’s easy to think that the land value has increased, but have you been to Winnipeg lately? Winnipeg has so much open space they still have gravel roads inside the city perimeter.

So if you own a rental place, you can either rent it for income or sell it. On average, the house value moves with inflation (ignore the last few years), so your sale will result in a gain in dollar value but no gain in real purchasing power. In fact, since the rental isn’t your primary residence, you’ll pay taxes on the capital gains, so you’ll likely lose purchasing power. That doesn’t include the fact that the home is both physically depreciating and it is costing you property taxes.

So the reason the PF Bloggers think of it as a rental is simply that the rental can operate on a cash-flow positive basis. In this way, owning a rental home is much like owning a dividend-bearing stock (but more complicated and time-consuming… hmmm)

@ Brandon – thank god someone else thinks he’s scary! I’m not going to wade into the argument of whether or not real estate will fall 40% or more, just that the man sells a lot of books to scared people and that upsets me as it seems to preying on the scared. I read his blog for entertainment (it should be noted he does not allow all postings to appear on his site) but entertainment only. According to his latest post I should sell my Toronto centre (real Toronto, not Brampton or Pickering “Toronto”) urban home and move to Barrie or beyond and learn to hunt for my own food. I think I’ll take my chances. For what it’s worth, I think real estate is somewhat overvalued but I don’t think it will drop anywhere near dramatically as he predicts or will stay down more than 1-2 years. My problem with Turner, in addition to his propensity to edit the record/facts to suit his current position (ie. anti-gst cuts to pro-gst cuts, or saying that mp’s should have a byelection if they switch parties and then switching parties but no byelection – his consitutents let him know what they thought about that) is that he’s been predicting real estate crashes / economic collapse every month for the past 5 years – he’s the broken clock of economic predictors – even a broken clock is still right twice a day afterall.

@Gate VP – What is the rate of inflation that your parents house has doubled? When inflation rates are too high, governments change how they calculate the inflation rate. It doesn’t make the actual rate lower, it just makes the reported rate lower.
I haven’t read any Garth Turner, but I have read and watched some of the stuff published by Chris Martenson ( He seems to believe that the US dollar and therefore the whole US economy is going to collapse. There is also a website that tracks inflation and other statistics comparing the current calculations with how they were previously calculated ( By their reconing, the current inflation rate is more like 12%.
On the other hand you have guys like Warren Buffet saying now is a great time to buy.
At the moment I’m not panicking, but I guess I’m like a deer frozen in the headlights. I don’t know which way to go.

Hey @Greg, here’s the Bank of Canada inflation calculator. I use this on a regular basis when anyone talks in spans of more than 10 years. Please note that Canadian stats do differ from US stats, Canada has been running a surplus for several years and hasn’t needed to print as much money.

I definitely agree that there may be some government “fudging” of these numbers (whether by malice or by poor model). However, even if the real mean is 50% higher (say $170k instead of $145k), the house has still demonstrated significant post-inflation growth.

Now what you think of these “Shadowstats” is up to you. Based on anecdotal evidence, I’m tempted to agree that US inflation is much higher than reported. I see the US government basically operating an inflationary recession racket for as long as they can to try to buy their way out of this mess. (when you have an army larger than the rest of the world combined you can pull this stuff off). But that’s just my guess.

However, if you look at the “Shadowstats” unemployment numbers, you’re now asking a very different question. That question is “how do we handle all of these exceptions”. Inflation is a pretty simple “how much more does this stuff cost?”. But what counts as Unemployment? Do you count people on voluntary retirement? How about people who are switching jobs? Do part-timers count as less than one job? What about people who hold down two jobs? What if I do seasonal work or contract work and end up “unemployed” for periods of time? Do you include employed people who are dependents of a regular wage-earner? Do you exclude people who aren’t earning what would be considered a “living wage”? How about people on worker’s comp or maternity leave?

In Alberta a couple of years back, unemployment was at 3.5%, but everybody had a job and nearly every employer was looking for more people. And I do mean “every”, this was “negative unemployment”. Turns out 3.5% was pretty much the bottom of the model. It was basically impossible to get to zero :)

The point is, the models for measuring these things are extremely complex and have to make a lot of assumptions and value judgments based on what they’re trying to measure. Shadowstats is effectively changing some of these decisions and spitting out a new number. That number could be “better” or “worse” depending on your interpretation of those terms.

What is safe to say is that they probably have a good handle on the US increase in money supply over the last couple of years. To put this into perspective. Canada has a national debt around $600B and we’re about 1/10 of the size of the US. That’s about $500B USD, which means that the government “bailout” package is basically larger than the entire Canadian debt. Or another way, Canadian GDP is around $1200B so the US government basically created 6+ months of Canadian economy with their last bill :)