Four things to remember during market volatility
By ATB Investment Management Inc. 24 March 2020 6 min read
The financial headlines are pretty grim these days as the COVID-19 outbreak and slumping oil prices take centre stage. Watching the headlines (which is almost impossible to avoid when you’re stuck at home) can evoke some pretty serious emotions and cause fear to set in.
For those of us who were invested during the financial crisis of 2008, it was ugly. And, even if you’ve experienced drops before, markets drastically falling can shake even the most seasoned investor’s confidence.
With all the doom in and gloom in the markets and media right now, what should an investor do?
Here are four ideas to help you beat the uncomfortable feelings and manage your investments (as objectively as possible) during periods of volatility.
1. Focus on the long-term
You likely created a financial plan before you started investing and your portfolio was built around long-term financial goals and dreams. If your investment goals and your financial situation has not changed, then stay focused on that long-term strategy.
Even if you are close to retirement age, you will likely be using the proceeds of your portfolio for the next 10 to 30 years depending on your life expectancy. You want this money to last so you can live your best life in retirement.
As an example, let's review our most aggressive CompassTM Portfolio and what volatility looks like over the short and long term.
Compass Max Growth Series A
Annual Returns vs. Intra-Year Declines (2003-2019)
The red dots on the chart above represent the largest peak to trough declines the portfolio has experienced each calendar year, while the blue bars show the year-end net return. The Compass Max Growth series A portfolio, our most aggressive portfolio consisting of all equities, has average intra-year declines of -11.57% over the last 17 years. However, despite those average declines, the portfolio of all equities experienced positive returns in 13 of the last 17 years and has a since inception net return of 7% to the end of December 2019.
Another positive we can pull from this chart is that in the worst year on record, 2008, despite the intra-year drop of -36.9% by the year end, the portfolio ended up nearly 10% higher from that low. While the yearly peak-to-trough declines can be alarming, it can be comforting to know that even in our worst year, markets offered some relief by year-end.
We are currently in red dot territory and, right now, we don’t know what will happen with the markets in the coming months. However, we do know that market volatility is an inevitable part of the investment journey and staying the course by focusing on your long-term goals is your best opportunity at long term success.
2. Take a deep breath
Being an investor today is not always easy. Between Twitter, the financial news channels, the newspaper…etc. it is hard to get away from the daily headlines, good or bad. After being bombarded with headlines of another financial crisis like we experienced in 2008, even the most rational and level-headed person can feel anxiety. Seeing a massive drawdown on your hard earned capital is hard to stomach.
The important thing to remember is, when it comes to investing, it is not if the markets fall apart but when. We know the only thing you can predict with certainty in the stock markets is that volatility happens and declines of between 10 to 20% happen every 2.5 years on average.1
Below is a chart of the S&P 500 total return index from the end of March 2009 to February 27, 2020. While the chart does show the growth of the index, it lists all the reasons to sell along the way. Despite the many scary moments along the way, the cumulative return over that entire period was 431%.
Reasons to sell (2008-2020)
The chart also shows that if you were to sell during a period of volatility, it likely means selling for a lower price, and buying back into the market at a higher price. Buying high and selling low is not the recipe for long term investment success. It can erode your capital and your chances of achieving your financial goals at a later date.
The main message here is that the patient investor is the successful investor. While there is always a reason to sell, markets have the ability to provide excellent compound returns over time.
Take a moment to breathe and remember you are in this for the long haul. Give your investments time to grow again.
3. Remember what stock ownership represents
As an investor in the Compass Portfolios or ATBIS Pools, you have an ownership stake in hundreds of companies. We do not invest in those companies for their daily price movements. We invest in the long-term ownership and profit generation of these companies.
We stress test a company before it is purchased to see how they would potentially handle the various curve-balls from the economy. We make sure these companies have healthy balance sheets and little debt on their books. This way, we know they should have the capacity to continue generating sustainable cash-flows regardless of the economic situation. Or, that they have the opportunity to take on debt to help them through the tough times as they came into this situation relatively debt free.
Another way to think about this is, if you owned a business and you faced a month or two of intense pressure and heard of other businesses that were struggling, would you immediately try to sell the business? Most of us would say no, we would not sell. We would likely do whatever we could to move the business through the rough patch.
If you wouldn’t sell your business, it can make sense why we don’t advocate for selling your investment in other businesses, knowing that they have been selected for their ability to roll up their sleeves and survive volatile markets.
4. Don’t be afraid to reach out to your advisor
Working with an advisor gives you access to a high level of investment expertise.
They act like the GPS in your car and can help to map out the most efficient route to get to your end financial and life goals. And, just like a GPS can help navigate construction or road blocks, an advisor is there to walk you through periods of volatility like we are seeing now.
They can reinforce the route you planned two months (or even years ago), pending that there have been no changes to life or financial circumstances, is still the safest and most efficient investment plan for you. Part of their job is to also empathize with the emotions you are experiencing, depending on your situation, and protect you from derailing your long term strategy.
The alternative would be to go the self-directed route which takes a tremendous amount of discipline and restraint. It’s difficult to pick stocks, ETFs and mutual funds that are likely to deliver strong, sustainable returns over the long-term.
You would need to make consistently effective buying and selling decisions and stick with your investments during market downturns or heightened volatility like we see now. Staying the course and remaining invested during times like we are in now can be exponentially more difficult if you are a self-directed investor.
During these difficult and uncomfortable times, it is important to remember why you are invested. If you reflect back on your long term financial and life goals, and they haven’t changed, ask yourself if it makes sense to make changes to your investments. The easy part is selling and getting out of the markets, the hard part is getting back in and missing out on the growth opportunities that exist following market drawdowns.
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Compass Portfolios is a trademark of ATB Financial.