Rob Carrick wrote today in the Globe and Mail that “This is no time to sell quality”. In fact, that is the headline of his piece.
He says: “Selling quality right now is probably the worst error you can get fooled into making by a plunging stock market.” I totally agree with him. Selling now is locking in your losses, and what’s worse, probably locking them in for a long time if you switch into guaranteed funds. The market has plunged deeply in only a few days. History shows it can recover with the same speed. Getting back into the market is usually done after the recover has started and you have missed the opportunity to make a significant gain in value. It’s a good example of locking the barn doors after the horses have left.
Unfortunately he also says: ”
Another mistake is to give up on the risks of the stock market and instead buy guaranteed investments like principal-protected notes or segregated funds. The appeal of these investments is obvious – you get exposure to stocks with no risk of losing money in down markets like we’re seeing today. The problem is with the cost of the guarantee – it cuts into returns so deeply that it’s simply not a good value.”
How could he get the main point so right, and then make so many errors in a following paragraph?
Segregated Funds resemble mutual funds and are not the same as Principal Protected Funds.
Although Segregated Funds have guarantees at maturity and death, there is no doubt that you could lose money in a down market, which is what would happen if you withdrew your funds from a Seg Fund right now.
The cost of the guarantee is an old maid’s tale as far as I am concerned. It reminds me of the banks saying their car insurance is cheaper because they don’t pay commissions. While it is true they don’t (usually), they pay salaries instead. Many Seg Funds expenses are lower than those of mutual funds which do not have any guarantees, but he does not say they are ‘bad value’.
Perhaps he is speaking from the point of view of a stock investor, rather than a mutual fund investor. He obviously has strong – but misguided in my opinion - thoughts about Seg Funds.
But I certainly agree with his view that a wise investor who is in it for the long haul would do themselves a lot of financial damage if they withdrew from the market at this point.