Written by Tyler Simms, CFA, CFP co-authored by Jason Maniotakis, CFA, CFP on behalf of Private Investment Counsel (PIC), ATB Wealth’s discretionary portfolio management team. PIC specializes in working with ATB’s high-net-worth private clients and institutions.
Being an investor in 2022 hasn’t felt good. That’s self-evident. The laundry list of concerns seems never ending: high inflation where it hurts most (in the grocery store and at the pump), rising interest rates, continued supply chain issues, COVID-19, and of course, the uncertainty relating to the current and future economic impacts of Russia’s invasion of Ukraine.
This year’s pullback is no different. You wouldn’t be human if you didn’t fear loss. Behavioral economics explains that investors feel the pain of loss around twice as much as they feel the joy of gains. This is what leads some to do the wrong thing at the wrong time in their portfolio, and what makes successful investing so challenging.
Throughout time, there are always plenty of reasons for market uncertainty — all of them unique and unforeseeable. Here are a few examples in the chart below.
Annual index returns and intra-year declines
We invest to constructively grow our hard-earned savings at a meaningful rate of return in order to support longer-term objectives such as retirement spending needs. Unfortunately, the path to achieving these objectives is never a straight line. Enduring market volatility is the price we pay to generate a rate of return that is a measure above lower-risk options like GICs or high-interest savings accounts. If stocks and bonds only ever went up, investors would universally pile into them, bid up their prices, and compress the rate of return potential. Market volatility is what keeps many investors away, while also rewarding those who stay invested, have a long-term focus, and stick to a no-nonsense investment portfolio.
Fortunately, investment markets have a long history of rising the majority of the time. The US stock market (as measured by the S&P 500 Index) is the largest stock market in the world and has posted a positive rate of return in around 78% of years since 1982.
The difficulty, of course, is predicting when the positive and negative periods will occur. That’s why time — not timing — is everything. And it’s why aligning your investment plan for the appropriate time horizon is so important; it puts your portfolio in the best possible position to achieve your objectives.
There is always a trade-off between comfort now and comfort later. It would be ideal to achieve a superior rate of return with minimal volatility but unfortunately, there is an inverse relationship between the two.
There are similarities to our approach to investing, and owning a successful business, corporation, or farm to build your wealth. Businesses go through cycles of various forms, many of them uncomfortable. However, the economic benefits make it worthwhile over time. This aligns with our objective of owning a portfolio of global, market-leading businesses that we expect to create wealth over time, through economic and business cycles.
It may seem hard to believe, but the work that goes on inside your portfolio during a downswing is usually most critical. The price we pay for an investment has a direct correlation to the returns we expect from it in the future. It’s during times like these that our portfolio managers position our client portfolios to take advantage of current market declines , in anticipation of an inevitable recovery.
Our allocation to Canadian equities and relative strength in our fixed-income holdings have allowed us to take advantage of the weakness overseas, buying companies at valuations not seen since the depths of the initial pandemic sell-off.1 Across the funds, we continue to actively rebalance trimming our Canadian equities and fixed-income holdings, re-deploying the proceeds into US and international equities. The funds have been rebalanced into international equities three times this year, with the latest round of buying on March 7. You can read the latest update from the ATBIM portfolio management team here
Regardless of economic, geopolitical or market adversity, ATB Investment Management’s playbook always remains the same; our priority is to build resilient portfolios that are well diversified and professionally managed, and that comprise high-quality individual equities and fixed-income securities. These ingredients don’t aim to avoid the inevitable fluctuations of investment markets, but they do position your portfolio for durability and recovery through market cycles. We aim to position the portfolio for this higher ground.
It’s important to note the distinction between risk and volatility, which we wrote about in this article. The diversified nature of your portfolio will help to smooth out returns over time (ie. reduce volatility). But the more important advantage is to ensure your capital is protected from permanent loss. Regardless of the severity or duration of a market decline, proper diversification ensures capital can fully recover over time.
While market volatility is unsettling, it is part of the investment journey to achieving the objectives set forth in your financial plan. Our investment process is centred around preparation, not prediction. We know that the stock market, much like life, can often be unpredictable. We have a nearly 20-year history of helping our clients manage their portfolios over multiple market cycles and we will continue to help build your wealth so you can focus on what matters most.
**Returns for the S&P 500 and MSCI EAFE are based on price return index data in USD, S&P/TSX Composite based on price return index data in CAD, and includes dividends. Index values will fluctuate and past performance may not be repeated. Intra-year drop refers to the largest market drop from peak to trough in each calendar year. Average intra-year decline refers to the simple average of the intra-year drops in each year during the period of 1982-2019.
This document and all of the content has been compiled by ATB Investment Management Inc. ("ATBIM”) which manages the Compass Portfolios and ATBIS Pools. ATBIM and ATB Securities Inc. ("ATBSI") are wholly owned subsidiaries of ATB Financial and are licensed users of the registered trademark for ATB Wealth. ATBSI is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.
Opinions, estimates, and projections contained herein are subject to change without notice, and ATBIM does not undertake to provide updated information should a change occur. The information in this document has been compiled or arrived at from sources believed reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. ATB Financial, ATBIM and ATBSI do not accept any liability whatsoever for any losses arising from the use of this report or its contents. The material in this document is not, and should not be construed as an offer to sell or a solicitation of an offer to buy any investment. This document may not be reproduced in whole or in part; referred to in any manner whatsoever; nor may the information, opinions, and conclusions contained herein be referred to without the prior written consent of ATBIM.
Compass Portfolios is a trademark of ATB Financial.