Ever since Donald Trump took office on January 20, markets have been unusually volatile. The big U.S. indexes (i.e., the Dow, S&P 500 and NASDAQ-100) are down for the year. The TSX Index is down less than those indices (2.67%) but still in the red.
It’s hard not to suspect that Donald Trump is behind all of this. In addition to the newfound volatility that followed Trump’s inauguration, many of the market’s worst days were those when Trump’s most controversial policies were announced. For example, on April 3, the day after Trump’s “Liberation Day” tariff announcement, the S&P 500 fell 247.45 points, or 4.8%. Similar crashes were observed during the escalation of mutual tariffs between China and the United States.
So, it’s likely that Trump has played a role in this year’s bear market.
If you’re like many Canadians, you’re probably a little peeved about this. “First, the guy tariffs us; then he crashes the market?” It’s all been a bit much to take in. However, we’ve been here before. In this article, I’ll share some perspectives on how to deal with the market crash that Trump has unleashed on your portfolio.
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Market crashes are temporary
The first mindset to adopt during market crashes is one of calm recognition that these things are temporary. It’s natural to get scared when your stocks fall in price day in and day out, but someday, they’ll rise again. If you’re near retirement and down by high percentages, that’s little consolation. However, the North American markets as a whole are only down 10% from their all-time highs. There is still time to move some of your money into Guaranteed Investment Certificates (GICs) or treasury bonds.
This could get bad
Now, having gone through all of the above, a more cautious note is in order.
Stock market crashes can get quite bad. In 1929, the Dow Jones Industrial Average fell 90%. In the 2000-2002 tech stock crash, the NASDAQ fell 89%. In worst-case scenarios, stocks can go down quite a bit. Given that stocks were very steeply priced at the beginning of the year and Trump’s tariffs are adding recession risk on top of that, it’s definitely possible that we’ll see such a decline this year. So, having 40% or even half of your money in GICs right now could be wise.
Dollar-cost averaging
As for the money you keep in stocks, you can invest that profitably and grow your gains during a market crash by dollar cost averaging.
Let’s take BMO Canadian Dividend ETF (TSX:ZDV) for example. It’s a dividend ETF that has a 3.84% dividend yield at today’s price. The way that dollar cost averaging works with a fund like ZDV is you invest a little bit of money in it — let’s say $200 — every time you get paid. If the fund goes up in price, you get to enjoy your gains. If it goes down in price, you get to buy progressively cheaper, driving higher gains in the future.
This averaging of costs makes dollar cost averaging a very wise strategy. If you do it with ZDV and the ETF goes down 50% in price, then the yield goes to 7.68% — assuming the dividend doesn’t change. Of course, in a market crash, you have to expect dividends to be cut here and there. Usually, there is an economic rationale for the crash. Nevertheless, dividend yields do tend to be quite high at the bottom during market crashes. If that’s not motivation to keep buying when stocks are going down, I don’t know what is.
