When stocks plunge check risk tolerance, financial plan

Re-evaluate whether you can tolerate volatility

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OTTAWA – The plunge in the stock markets in recent days may have rattled investors, but a financial adviser says the drop is a reminder of the importance of understanding your risk tolerance and building a strong financial plan.

The S&P/TSX composite index is down more than 15 per cent from its high reached last year, while the Dow Jones industrial average is off more than 10 per cent from its high reached earlier this year.

“If you are telling me today that your risk tolerance is not what you thought it was and you’re in the wrong model and you don’t want any downside losses, then we have some things to chat about,” said Brent Vandermeer, a portfolio manager with HollisWealth.

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“This is part of what equity markets have consistently done and will continue to do and we have to endure these downside storms even though we get very fearful and worried it is going to keep going down to zero.”

If the plunge in the markets has rattled your nerves and you’ve realized that you really can’t tolerate the risk like thought you could, Vandermeer recommends making changes to your portfolio now, not waiting for a little bounce back.

“You can’t postpone and hope that tomorrow is better,” he said. “The trend is usually persistent for a while and that’s the unfortunate part.”

While the drop in recent days looks big, compared with the downturn during the 2008-09 financial crisis, the move remains relatively small.

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During the financial crisis, the S&P/TSX composite index dropped more than 7,000 points from its high in 2008 before the crisis to its low point in 2009.

The drop in the market follows a move by China earlier this month to devalue its currency amid concerns about growth in its economy.

The stock market has also been fuelled in recent years by the flood in cheap money made available by central banks, which helped keep interest rates low.

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