Welcome back to the blog!
In addition to working with clients on investment and wealth management, I write a blog on tax tips and tidbits and share other articles that I think will be of interest. In this edition, I've written about the importance of maintaining a long term investment strategy to remain on track.
In the last few months, the markets have produced some staggering headlines, as we’ve endured the fastest bear market in history followed by a sharp rebound, leaving many left wondering what lies ahead.
It remains likely that we may encounter more jarring headlines that test investor resolve before things arrive at a new normal, which presents a challenging question, what’s the best long term strategy to stay on track?
In the below blog, I've provided a few thoughts to help guide both emotions and actions:
- Facts about market recoveries
- Investor mistakes to avoid
- Actions to consider
Facts about market recoveries
Fact #1 - Recoveries are much longer than downturns
A bear market is incredibly unsettling, however, the good news is that in the past, they have been relatively short in comparison to the recoveries.
Even though each bear market feels different, worse than the one before, and as though they may last forever when we are in them, they are actually much less impactful in comparison to the long-term power of bull markets.
If we look back to 1950, each bear market has on average lasted for a 14 month duration, whereas in contrast, the average bull market was 5 times longer. The difference in returns is similarly dramatic, as the average bull has returned 279 percent, although it is rarely a smooth and steady ride along the way.1
Sometimes it is necessary to withstand scary headlines (is there any other kind?), heightened market volatility, and additional declines to fully participate in the long term growth that lies ahead. It’s quite simply the price that we pay to earn the returns that we need over the long term.
Fact #2: Markets recover more quickly after large declines
It is impossible to know exactly what this recovery will look like, however, if we turn to history as a guide, the markets often recover sharply following steep declines.
If we look back to 1929 this time, every S&P 500 decline of 15 percent or more has been followed by a recovery in which the average return in the first year after the decline was 54 percent.2 Similarly, if we look at the 5 worst bear markets over this same time period, the first year following the bear market returned an average of 71 percent to investors.3 Finally, consider the last 2 months and ask yourself “Did I expect the market to rally 35% from the lows on March 23rd when all news was bad news?” The markets are a forward-looking mechanism, they are already building in the recovery that will ultimately come.
It is possible that future recoveries may be more muted, however, this still underscores the importance of staying invested and avoiding the urge to abandon stocks during market volatility to ensure you capture the full benefits as markets bounce back.
Investor mistakes to avoid
Mistake #1: Assuming it is a bad time to invest
In periods where markets are focused on specific risk events, it can be difficult to look past the short-term noise as the daily market fluctuations can be unsettling.
Nearly every year though is accompanied with a catalyst that gives investors reason for pause, whether driven by financial, political, or medical events like the current global pandemic.
However, over a longer-term horizon, markets are historically proven to be resilient and ultimately remain on a permanent upward course despite this unsettling noise.
Mistake #2: Trying to time the market
If you are still nervous about market volatility and are thinking about moving your investments to cash temporarily, sitting on the sidelines comes at a cost.
A move to cash may feel safe and initially bring feelings of comfort, however, if you sell at the wrong time or don’t get back in at exactly the right time, you can’t capture the full benefit of the recovery, and no forecaster or advisor can accurately or consistently predict this. It is important to pay attention to history and much less attention to forecasts.
Missing the 10 best days in the market over the past 10 years reduces returns significantly, and interestingly, the best days often happen during bear markets:
It is time in the market, not market timing that matters in investing as we’ve talked about. In the short term, the market is going to do what it is going to do, whereas in the long term, having a seat at the table is what really matters.
So remember, we have a long term plan, focus on it instead of panic selling. We have constructed a diversified portfolio of high-quality investments, and even if difficult, hold them through thick and thin.
Mistake #3: Focussing on the short term
A bear market can be extraordinarily difficult as the market volatility can be especially uncomfortable if you focus on the short term ups and downs.
Investors that have the courage and conviction to stick to their long-term plans in a bear market are rewarded as the markets bounce back as illustrated above.
Even in retirement, most investors still have a multi-year if not multi-decade time horizon, so the daily fluctuations are relatively inconsequential to realizing the long term returns necessary to achieve your financial goals.
Actions to consider
So how can investors weather the storm if market timing or moving to cash aren’t the answer?
Action #1: Tune out the headlines
It is important to remember that the performance of any one market index reported in the daily news headlines is not the same as the performance of your personal portfolio.
In the spring, we spoke to a lot of clients while reviewing their personalized plans and portfolios that were surprised to hear that their performance was a lot better than the market. Diversification matters, we’ll never own enough of one idea to make a killing if it works, nor will we be killed by it if it doesn’t.
Similarly, the stock market performance is also not the same as the economy, an important distinction that is perhaps best illustrated with a simple analogy referring to walking a dog (video link).
A person walking a dog across a park often does so with very few deviations, whereas a dog, in contrast, is running around like a lunatic, barking, jumping, and darting in all directions.
The dog is the stock market, the person walking the dog is the economy.
They both end up in the same place, they both go in the same direction most of the time, but there is a lot less deviation in how the person walks.
So while the market may be volatile at times, the economy is not fluctuating as much.
Generally, the worst thing to do in periods of volatility is to panic and unnecessarily abandon a well-constructed and personalized financial and investment plan. If your goals have not changed, then your plans generally shouldn’t change either. However, there may be opportunities or adjustments you should consider, which takes us to the next action point.
Action #2: Consider a portfolio checkup and review opportunities
The number one focus for us all right now should be the health and well-being of loved ones. However, it is also a good time to check the health of your portfolio, even if it is difficult to feel enthusiastic about investing in turbulent markets.
While we are monitoring your holdings on a daily basis, subsequent to major moves in the stock market, it may be a great time to revisit the portfolio to not only ensure it is well-diversified and aligned with your goals, but also to consider adjustments from either a tax or an investment perspective.
Great investment opportunities often emerge when investors are feeling most pessimistic. The coronavirus outbreak may feel unlike anything we have faced before, but uncertainty is nothing new to the market, which has been resilient over time. The markets will continue to go through periods of upheaval that lead to stretches of volatility, however, such periods inevitably pass.
Historically, the markets have always recovered to continue to build wealth and reward patient investors with substantial returns in the ensuing years.
This time will be no different in that regard.
I can be reached at email@example.com or 604.981.6681.
This blog and article may contain strategies, not all of which will apply to your particular financial circumstances. The information in this article is not intended to provide legal, tax or insurance advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax, legal and/or insurance advisor before acting on any of the information in this article.
This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license. © 2019 RBC Dominion Securities Inc. All rights reserved.