Over the past months we have seen a notable increase in volatility throughout the global markets, mainly due to concerns coming from China. As their economy slows there has been a resonating effect around the world, causing commodity prices to fall dramatically - and this is very evident in Canada as we look at the price of oil. As investors, it is concerning to look at our investment portfolio and see it decreasing, and our initial instinct is to immediately pull out our money in an effort to stop the losses. However, that is exactly the opposite of what we should be doing as wanting to take action should not mean reversing course. In this market commentary, we will look at the importance of taking emotion out of investing and preventing it from getting in the way of our long term success.
Having a Plan
An important aspect of dealing with the future relies on having a good sense of where you are, even if you can’t know exactly where you’re heading. Gaining a historical perspective on market trends and using it to assess the current environment is a great way to understand where we likely are in the current market cycle. Many investors will focus on short term gains and losses, but it’s better to keep an eye on your long-term objectives by remaining disciplined and focused on strategies such as: maintaining diversification through periodic rebalancing, achieving consistent returns over full market cycles, and mitigating volatility through downside protection. Making a plan and sticking with it is the best way to stay on track to achieving your financial goals and objectives.
The Importance of Periodic Rebalancing
Let’s say, after a thorough risk tolerance assessment, your portfolio was originally allocated with 60% equities and 40% bonds. Equities have done quite well over the past few years when compared to bonds, so if you haven’t periodically rebalanced your portfolio, odds are that the equity (riskier) portion of your portfolio has since grown to well over 60%. While this may sound great when the markets are on an upswing, it also means that your portfolio may be exposed to a higher level of risk than you are comfortable with during these volatile times.
Buy Low, Sell High?
Most notably, however, is the “human factor” that often leads to the worst outcomes over time. When markets are strongly trending up, greed leads to a decrease in the understanding of risk within a portfolio. As we see a positive trend we tend to go all in, often when things are hitting their peak. The reverse is also true; after a significant drop, we panic, sell our investments, and do the most damage to our long-term goals. Studies have shown that the average investor return of a particular investment will often be much less than the total return over the same period of time, simply because investors have bought and sold the fund at the wrong times, consequently missing out on a large portion of the total return. A strict discipline of risk management will not eliminate capital losses, however, it will minimize them to a level that can be dealt with logically rather than emotionally. As your advisors, it is our job to understand your objectives and keep you aligned towards them throughout your entire time horizon – especially during times of fear, panic, and greed.
The Bottom Line
We understand that it is easy to feel overwhelmed at times, but rest assured that your portfolio is being handled by investment managers that have seen similar market events many times before. They recognize these times for exactly what they are – opportunities to buy fundamentally great businesses at excellent prices. The bottom line is, successful investing over the long term is less about how the markets are doing and more about our reaction to how the markets are doing.
If you would like to discuss your current portfolio, please feel free to contact our office at 604-688-5262 for a review.
All the best,
P.S.Take advantage of market opportunities by contributing to your RRSP before the February 29th deadline!