How investing in a turbulent market can work in the long term
By ATB Wealth 19 May 2020 4 min read
The COVID-19 pandemic has unfolded around the world unexpectedly, affecting our lifestyles, livelihoods and, often significantly, our investments. Whether you’re new to investing or have been in the market for a long time, you’re likely feeling uneasy right now about the market turbulence.
Everyone is in a unique situation with individual challenges. There’s no one-size-fits-all solution when it comes to investing, particularly now. You may have experienced a layoff, had your hours reduced, or are just trying to weather the storm and make sense of what this all means in the long term.
Not knowing what will happen next can be stressful, but it can be reassuring to understand how market declines affect investments, how long it might take for your investments to bounce back and what to do in the meantime.
A look back at market history
While we haven’t seen a global pandemic like COVID-19 within our lifetimes, we have seen several market dips and corrections in the past century. And we can see how, historically, the stock market adjusts after large drawdowns.
Market recovery time
For the 24 bear markets (or instances where the market declined 20 per cent or more) observed in the S&P 500 since 1928, half the time, it took less than a year for an investor to break even. This should give you some comfort. While every situation is unique, markets tend to recover more quickly than you might expect.
Market history teaches us that volatility is part of investing and patience pays off in the long run.
If we look at the markets from 2008 to now, we can see there has been much short-term volatility, but those small drops can help a portfolio appreciate in value over time.
As an example, starting from the bottom of the financial crisis in March 2009 to March 16, 2020, the S&P 500 experienced a total return of 344 per cent, or 14 per cent a year in US dollar terms.1
During that time period, there were 25 drawdowns of 5 per cent or more. In those 25 instances, an investor could have panicked and moved their investments to cash, potentially losing out on this return.
It’s natural for emotions to come into play when we start to see negative returns, but remembering that investments tend to recover well within a relatively short period of time should help make you feel at ease.
Tips to make the markets work for you
What can we learn from market history to set ourselves up for achieving our long-term investment goals? Having patience with your investments and building a financial plan will help you feel secure and confident about your financial future. While every plan is unique, there are a few tips that can help make the markets work for you.
1. Have a balanced portfolio
Asset allocation (cash, fixed income and equities) is the single most important factor in the investment process. Ensuring you have a well-balanced portfolio that aligns with your risk tolerance allows you to reach your financial goals, while withstanding short-term volatility in the market.
Everyone has a varying degree of risk tolerance for market volatility and unique investment goals, which is why there are different types of portfolios available.
Risk tolerance refers to how much day-to-day volatility you’re comfortable with. The day-to-day volatility in your portfolio is tied to the asset mix and level of diversification within it. Diversification refers to the collection of bonds and equities that make up your portfolio.
With the help of a financial advisor, you can select a portfolio that will work for you and weather any storms that may come your way.
2. Avoid emotional decision making
You might be feeling a lot of anxiety and stress right now, which is understandable. Stay steady with your own financial goals and remember that this time will pass.
Try to avoid making short-term investment decisions based on feelings of fear, speculation or greed. Rather, use this time to review your plans and goals and remember the benefits of long-term investing.
3. Give your investments time to recover
As mentioned earlier, time in the market gives investments more time to recover, and history shows that they recover well from a bear market.
Most people are investing for three, five, 10, 15, 20 years or longer. Seeing short-term drawdowns on your investments can make you feel nervous, and you may feel the urge to move your investment to cash. This can limit the long-term growth of that investment. It’s often said that “time in the market is more important than trying to time the market.”
Looking back at the earlier examples, it’s easy to see that staying invested is the right approach to staying on course. However, if you need to access your investments in the immediate future, we suggest working with your advisor or reaching out to an ATB Wealth expert to determine the best plan for your financial situation.
Right now, things feel uncertain. Don’t be afraid to reach out to your advisor or financial institution for advice and reassurance that you’re on track with your plan and reaching your long-term goals.
For more information, our resources page offers timely insights and advice to help you navigate your life and finances during COVID-19.
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