Financial markets fell further this morning, pushing major US, Canadian and Global indexes closer to bear-market territory as a price war for oil began between the Organization of Petroleum Exporting Countries (OPEC) and Russia and as the fallout from the coronavirus outbreak is reaching potentially pandemic proportions.
Stock trading was halted this morning after a fast 7% drop, triggering the first of three breakers which activated due to extreme volatility. This is designed to give buyers and sellers a chance to regroup. People seem to be selling for a variety of reasons, but an important thing to note is that everything that gets sold must have a buyer on the other end.
We have seen many significant contributions to increased volatility. The year started with military tensions between Iran and the U.S., followed by the covid-19 outbreak, and now an oil price war between Saudi Arabia, OPEC and Russia. The next U.S. Fed meeting is in ten days; however, the U.S. might not be able to wait as the world looks to them to be the guiding force throughout this time of fluctuation. The next move the U.S. Fed takes is important as it will show if there is a plan in place rather than simply just cutting rates. Last week the Bank of Canada cut rates 50 basis points but left the door wide open for further cuts, which experts expect the bank to deploy. Markets globally are now expecting rates to be cut to around 0%.
In the meantime, investors around the world are plowing into safe-haven assets like treasuries and bonds, sending the U.S. treasuring curve below 1% - meaning every U.S. bond currently yields less than 1%. The 10-year bond yield has gone from 1.5% to 1% to 0.5% in three sessions.
But let us remind you of what remains true, even in times of extended volatility:
YOUR RETIREMENT PLAN ISN’T GOING TO CHANGE
Your plan shouldn’t change, and nor should the future use of your money. Which means throwing out your long-term plan or radically changing your portfolio doesn’t make sense at this moment. By fleeing asset classes or current positions, you are locking in permanent losses. By panicking and altering the plan, your dreams of tomorrow will be delayed.
For clients withdrawing an income from their investments, the construct of your portfolio has been properly balanced to your retirement income goals to weather this type of market volatility. High-quality fixed income assets are delivering a substantial positive performance offset to equity market declines. By design, your portfolios will increase exposure to areas of capital markets that are beaten down and lighten up on the less volatile assets (bonds), which are in the portfolio for exactly these kinds of situations. We are being proactive with your investment portfolios to mitigate against large swings in the market and continue to stay the course with your long-term plans.
UNDERSTAND YOUR RISK
Risk is two parts- ability and willingness . Many investors have reacted quickly to this short-term volatility, which is often a sign that individuals aren’t secure in their investment strategy. Much of these concerns stem from their lack of confidence in the financial planning process that led them to their current investment holdings. As Warren Buffet has famously said and which is so often repeated: “Risk comes from not knowing what you’re doing.” Nowhere is this truer than when considering a person’s own investment portfolio. In the linked blog, we discuss the two parts of risk- ability and willingness- and how understanding both will help you through extreme cases of market volatility.
DOLLAR COST AVERAGING
If you don’t have the stomach for volatility, a strategy we recommend is dollar cost averaging. Dollar cost averaging acts as a form of risk control. This means periodically investing, typically on a weekly or monthly basis, rather than once during the year. This investment strategy tends to be less risky than lump-sum investing as it diversifies risk across time.
Furthermore, dollar cost averaging acts as a form of risk control. This means periodically investing; typically on a weekly or monthly basis, rather than once during the year. In other words, periodic investing tends to be less risky than lump-sum investing.
WHY CAN’T WE JUST ‘TIME THE MARKET’?
It is a question every advisor is asked routinely, and that stems from genuine curiosity: why can’t we just try and time the market? The basic answer to this is that no one- in the history of the stock market- has been able to perfectly predict the market. There is no clear signal of a downturn or an upswing that is an obvious indicator to either jump in or out. Further, when the dust settles, how will you know we’ve reached the bottom? And when stocks begin to rally again, in anticipation of a recovery, will you have missed out?
The best example of this was during the 2008 financial crisis. At that time, large numbers of investors liquidated their entire portfolios hoping to stop the bleeding. Then in March 2009, the market stopped going down. Was there a big announcement? No. People still thought that wasn’t the end; the general consensus was the market had more room to go down, but over the next three months the market climbed 41% from the March low.
Even then, with the added volatility, investors weren’t sure what direction the market would go. The investors that had liquidated and remained on the sideline, missed the new record-high and hundreds of percentage points in compounding growth on their assets.
No one has a crystal ball to predict the ups and downs of the market. Trying to predict these flexion points is impossible. Food for thought, the best 25 days in the market usually follows the worst 25 days – you can’t experience the ups without the downs. Anyone who claims the ability to ‘time the market’ is either lying to you or uninformed.
SO WHAT NOW?
The system right now is clearing itself from overleveraged and panicked investors and institutions. The one thing you can control are your own actions. Everything else is out of your control. The best thing you can do is be well informed, have patience and trust the process of your plan.
Our investment philosophy of goal-based investing is a methodical process of constructing your investment portfolio around your financial goals, where we factor in your risk profile, investment goal time horizon, liquidity needs and household debt. This disciplined process and framework prevents unnecessary risk to your portfolio, or “chasing returns,” and prevents behavioural mistakes in times of high stress and volatility.