“Wash your hands!”

“Definitely sell!”

“Did you see the news?”

“Buy low?”

Investors are hearing it all right now. If you’ve been investing for a while you have probably heard media noise like this before, but you may be thinking - “am I still on the right track?”.

On the other hand, new investors might be thinking “did I make a big mistake?” This uneasy feeling is normal when you see your investment portfolio decline in value, especially when you’re a new investor. We wanted to tackle some of these concerns head-on. Below you’ll find our answers to the questions you may be asking yourself at this time.

Before we get started, if you need a quick catch up on what’s happening in global markets, or just want to hear what ATB Investment Management's Chief Investment Officer has to say, check out our latest market updates.

Dealing with a perfect storm for investors

Over the past month, we’ve seen volatility in the market with significant drops. Outside of these market movements, Albertans are facing a lot right now. What is the right way to be responding to a declining investment portfolio?

There is no right way to process the amount of information that is coming at you. This will look different for each person. You may find yourself feeling calm about your portfolio right now, or on the other end, more panicked about your investments. Know that your emotions are unique to you but similar feelings are experienced by investors around the world.

This is explained by loss aversion, which is the natural human tendency for investors to fear losses more than they enjoy gains. Losing is tough and losing money is no one’s first choice.

When you sit down to review your investment portfolio (this does not have to be a daily occurrence!), it might also be a good time to review your investing goals. Have you experienced any major life changes since you set these goals for your portfolio? If so, it could be necessary to make some adjustments. If not, recognizing that the current market environment is a normal part of long-term investing will help you fight the urge to make changes to your portfolio. While not always easy, this will be enormously beneficial to you when you reach the end of the investment horizon.

Is volatility truly normal?

Investors keep hearing that this volatility is a normal part of investing, but how normal? Have markets ever declined this much before?

The current decrease in markets is not unprecedented at this time. What makes this experience unique is that it is largely a result of a global pandemic and its impact on economies around the globe. You are likely seeing this in the cities and towns you live in. Local businesses are closing out of dedication to the safety of their community. It is also happening in massive corporations where we see decreased levels of demand for goods and lower production in some sectors, which leads to declining earnings (the money companies make) and therefore depresses stock prices.

Other tumultuous times you might remember that lead to market declines include:

The Gulf War (1990): Canadian markets were down 25% in the year and ended the year down -18%.

The dot com bubble (2000): Canadian markets were down 24% in the year and ended the year up 6%.

The financial crisis (2008): Canadian markets were down 49% and ended the year down 35%.

Even as recently as 2015, many Albertans will recall the global collapse of oil prices. During 2015, Canadian markets declined by -18% and ended the year down -11%. While these world events may have very little in common, they all led to the decline and eventual increase in investment returns as a result of price recovery (with a side of investor uncertainty along the way of course).

The frequency of five percent drops explains what recovery from these uncertain times can look like and what it means for your portfolio.

How long do we need to put up with these declines?

In all of those scenarios, the decline was not short-lived. If this is going to go on for a while, would this be the time to sell before it gets worse?

In most cases, this would be the least advantageous behaviour for a long-term investor. As highlighted in the examples above, there are gains to be earned on the upside of this decline. Just like we talked about how less demand for goods can depress a stock price of the company that sells them (among many other factors), an increase in demand and a recovering economy can have the opposite effect, and this is the part that is worth waiting for.

As consumers shift from saving their money for hard times to spending their money during better times, we typically see a positive effect on equity markets.

Think of your favourite local ice cream shop that closed down this week. When business picks up and it has lineups out the door again, they will increase their staffing, maybe their product line, and would have more money to invest in equipment or other tools (scoops!).

This kind of growth happens on a much larger scale at the corporate level. It will drive gains in the portions of your portfolio that are invested in equities, and this growth is important for your long term savings. If you sell out on a decline, you will miss out on these earnings.

This is easier said than done, but it’s important to understand that there are diversified portfolios built so that this can be achieved at varying risk levels. Investors look to be compensated for the risk they assume when investing in equities, but they should also be able to sleep at night while staying invested.

If I can’t tolerate losses in my investment account, what can I invest in to make sure I make the most money possible but also lose as little as possible?

To increase returns, investors must increase the amount of risk they assume. With risk comes greater fluctuations in value like we are seeing now. Reducing these fluctuations in value typically means you will experience a lower return over the long-term.

Risk looks different to everyone. Ice climbers on frozen waterfalls process and calculate the risk of their favourite outdoor activity differently than those of us who consider a change up to our morning coffee order to be a risk.

What’s important about risk is understanding where you and your goals are comfortable. One of the best tools for helping you reach this decision is a financial plan. Sometimes risk is necessary to help investors reach their goals and a financial plan can serve as an idea of just how much risk might be necessary. Of course, increasing risk isn’t the only way to meet your goals. Investors can adjust other things too. Like how much they save, how long they save for, or their various streams of income (side hustle anyone?). But without a financial plan, it can be difficult to narrow these figures down. For some investors, Guaranteed Investment Certificates (GICs) might be the only version of saving they feel comfortable with. For others, a balanced mutual fund gives them that same comfort.

Where to invest your money?

If investors want to make the most money possible right now, what should they invest in?

At the risk of sounding like a broken record (and at the further risk of explaining what a record is), we want to take this conversation back to financial goals. If your time horizon, comfort with risk, and financial plan allow for it, even though stock prices are depressed, it poses a great opportunity for purchase. When invested in a diversified mutual fund, you will have portfolio managers who are making these trading decisions for you based on comprehensive company and market analysis.

The last thing we want you to do is take advantage of this market downturn to speculate. There is a big difference between speculating and investing.

We know you are hearing it all right now. But let’s shift this conversation of doom and gloom, so it sounds more like this:

“Know that your uneasiness is valid - we hear you and know there’s a lot to take in right now.”

“Review your financial plan so you’re working towards your goals.”

“Volatility can be part of the plan.”

“Wash your hands!”