Monday, March 23, 2020

Reader Question: What to do about the Stock Market Crash

Art asks the following (lightly-edited) question about what to do with his portfolio now that the stock market has crashed.

Like everybody, I guess, I've lost a lot of money. Life goes on and I'm surprised at my risk tolerance. I have no desire to sell low (I grew up on the game Stock Ticker).

But I do get monthly RIF and LIF payments. As I can't stop payment, due to current conditions (and assuming that things will get better), I'm thinking of switching from month to month to an annual withdrawal which would leave me having losses only on paper. That makes sense to me as I can live without my RIF and LIF for now. I set up some GICs and they will keep me floating for a couple of years.

My second idea is, if I stay month to month, is to sell bonds (in my case ZAG) as they have suffered less damage than the stocks. I'm using Couch Potato 50-25-25, XAW/VCN/ZAG. Along with that, I would start a new RRSP as things are certainly a bargain right now and plough back whatever I get month to month and as above, and live off my GICs.

This is WHY we have GICs, right?

If you can let me know what you think, I would appreciate it.

Let’s start with the important stuff: I played Stock Ticker as a kid too. I don’t know if it had any effect on my risk tolerance, but who knows what drives these things. It’s good that you’re not panicking, Art.

As for the rest of your questions, my choice has been to continue with my plan unchanged through this market crash. But it’s important to look at exactly what it means to stick with my plan, because parts of it look similar to your thoughts.

My plan involves maintaining an asset allocation currently at about 80/20 between stocks and fixed income (cash, GICs, and short-term Canadian government bonds). The stock market crash has thrown this balance way off, so I’m selling bonds to buy more stocks to restore my balance.

Now that your stocks have tanked, your allocation to ZAG and GICs is high. So it makes sense to either shift some bonds or GICs to stocks, or live off bonds and GICs until you’re back to your desired asset allocation.

You could decide to go further and just live off your fixed income longer than it takes to restore your target allocations. This would effectively increase your stock allocation percentage higher than it was before the crash. This would be an active choice, but not one I’d make myself.

As for what to do with cash flowing from your RIF and LIF that you don’t currently need to live on, keep in mind that the government is letting you reduce RIF payments by 25% this year. If you’ll still have more cash than you need, then it makes sense to invest the excess in a way that’s consistent with your overall portfolio’s target allocations. Whether you invest this extra money within an RRSP, a TFSA, or a non-registered account depends on whether you have TFSA room, RRSP room, and a high enough income to justify making an RRSP contribution.

Whether you should change your withdrawal frequency from monthly to yearly comes down to convenience for me. I prefer yearly because it’s less work and I don’t have tight cash flow. Your idea is to delay selling stocks right now, which is an active decision that I wouldn’t bother to make, but is mostly harmless.

The question about why we have GICs depends on your philosophy. There are certainly many people whose plans involve shifting all spending to GICs after a market crash while waiting for stock prices to recover. This is obviously an active decision based on when you declare a stock drop to be large enough to call it a crash. As you have probably guessed, Art, I prefer a mechanical strategy without any hard switches from one mode of handling a portfolio to another.

So you’ll have to decide whether you want to follow your gut or just follow a mechanical plan that can be coded into a spreadsheet. One benefit of the mechanical strategy is that it eliminates hand-wringing about what to do next.


  1. In other words, "It depends." Thanks for a thoughtful discussion.

    1. Hi Deborah,

      If you have a plan that anticipated the possibility of a stock market crash, then it makes sense to follow that plan. If you don't have such a plan, then you're in the "it depends" category.