CapitalTime
Articles on investing and capital management, with a quantitative focus.
What Should An Investor Do?
2025-03-31
The news headlines are terrible and stocks seem to be falling. What should an investor do in this environment?
Generally, the correct answer is: do nothing. This is a core principle of passive investing and index-based asset allocation.
For proper advice, you should speak with a financial advisor. Here are my amateur thoughts on some reasonable things an investor might do at times like these:
- Think about your asset allocation
- Don’t make any hasty decisions
- Watch for tax opportunities
Think about your asset allocation
Every investor needs to be comfortable with their asset allocation. It’s going to be hard to stick with a portfolio if you aren’t comfortable with the allocation plan.
The goal is to find an asset allocation which is right for you. Hopefully, you’re comfortable with your current asset allocation, and can leave the portfolio alone. It’s also possible that your current allocation is not a good fit for you, in which case you should figure out a new plan… something you can really stick with.
Several back-testing tools can show the historical behaviour of different asset allocations:
- Testfolio has extensive US data
- The Stingy Investor Asset Mixer has Canadian data
- The Portfolio Visualizer has both US and Canadian data
For example, a 60% global stocks, 40% bond allocation shows frequent drops of 15% to 20%, and a worst-case decline of 37% during the 2008 crisis.
Don’t make any hasty decisions
If you suspect that you need to switch to a new asset allocation, don’t rush to make any changes. Take time to thoroughly research the matter. Ask yourself questions like:
- Would I be happy with this when the market is strong?
- Would I be happy with this when the market is weak?
- What if things go back to “normal” next week?
- Can I really stick with this plan, no matter what?
Watch for tax opportunities
Speak to a financial advisor or tax expert for proper tax advice in your country. As a Canadian taxpayer, here are some things I’m watching out for:
Stock investments in my taxable accounts will incur capital gains taxes upon sales. Market declines can provide a good opportunity to make transactions while incurring lower capital gains. For example, I might want to replace one ETF with a newer, perhaps lower-fee alternative (while preserving the same asset allocation). If the market falls significantly, this presents an opportunity to make these kinds of transactions without triggering large capital gains.
Tax loss harvesting is another opportunity in declining markets. The Canadian tax system allows an investor to realize a capital loss and then carry it forward indefinitely. This capital loss can then be applied against a future capital gain, possibly nullifying taxable gains! If one of my index ETFs declines very significantly (I would watch for a loss of several thousand dollars), I can sell that ETF and immediately buy a similar replacement. There are caveats to watch out for, but if done correctly, I could “harvest” a capital loss, and use it in the future.
— Jem Berkes