Time and time again, the market tests our faith and emotional resilience. We know the long-term strategy. We know what we are supposed to do, or more importantly, what we are not supposed to do, during times of market volatility. Yet, when portfolios drop in value, investors question their investment plan and in some cases, abandon them altogether.
Given the current market conditions, we thought it would be beneficial to give investors a reminder of things to do in times of market uncertainty.
- Stay invested. This is a simple concept, but incredibly difficult to follow when emotions get involved. The reality of pullbacks in the market is that units of funds, or shares of companies, are down in value. As an investor, you still own those shares, however, they just happen to be down in value, temporarily. The moment you sell any units or shares, you eliminate any possibility of participating in the recovery of those units or shares. Let’s relate it to real estate. Given the increasing interest rate environment, the values of properties are starting, or will start, to come down. If you own your property, then you probably aren’t thinking about selling it because the value has dropped from previous highs. The expectation is that the property will eventually start going back up in value once the interest rates have stopped increasing. If the time horizon is long, then just continue owning the asset. This applies to real estate and to the stock market.
- Look for alternative income sources. If you are drawing income from your portfolio for living expenses, then you may want to temporarily stop the payments while the market is dropping. An emergency fund of cash in a bank account is an opportune place to temporarily withdraw from until the market has stabilized. A low-interest rate credit facility is another option for substituting your portfolio income. This can be in the form of a home equity secured line of credit. Typically, the interest rates are lower and the repayment options are more favourable versus unsecured debt facilities. Both options provide a temporary source of income to avoid having to sell out of the portfolio in a falling market.
- Rebalancing. Your balanced portfolio will have a target asset allocation. For example, 60% in the stock market and 40% in fixed income instruments (i.e. bonds). Because the market is dynamic, on any given day, the asset mix may have deviated from the target. When this occurs, it is important to execute the necessary trades to bring it back to the target asset mix. Simply put, to rebalance the portfolio you are selling a portion of the portfolio that had just done well and reinvesting the proceeds into the portion that had just dropped in value. Although this strategy sounds counter-intuitive, it is the best way to put your portfolio in the best position to benefit from the recovery. The concept of rebalancing is an unemotional way to “buy low and sell high”, which is the simplest way to earn a return in the market.
- Invest your cash. Every October, we see consumers get into unnecessarily long lines to take advantage of “Black Friday” shopping deals. The concept is sound – use your resources to buy goods at a discount. Consumers are making their dollars work harder for them by purchasing items for a lesser cost. However, the same concept does not apply when it comes to buying assets that produce income. The stock market dropping in value means that ownership in companies is cheaper than it was before. In fact, most investors adopt the opposite practice for investing in the market – investing their cash the moment companies get more expensive (go up in price). Buying high and selling low rarely equates to success in investing. Cash rarely earns enough to outpace inflation. The current inflationary environment should be reason enough to get your money working harder for you, especially if the time horizon is long (i.e. > 10 years).
These are simple concepts that will make your investment experience much more enjoyable. Speak with your advisor to discuss any or all of these in more detail.