Special Blog Issue:  Market Volatility

LESSONS FROM A NOBEL LAUREATE

Practical Words of Wisdom from Colleen O’Connell-Campbell

Last week, I attended the Annual Advanced Canadian Conference with Dimensional Fund Advisors. I spent three days in a classroom at the University of Chicago, Booth School of Business. The University of Chicago has produced some of the world’s brightest minds in finance; minds, such as Eugene F. Fama MBA 1963, PH.D 1964, who shares the 2013 Nobel Prize in Economic Sciences for his work on the empirical analysis of asset prices. This work and much more has shaped how both passive and active portfolio managers create investment portfolios. I was thrilled to have a front row centre seat when he joined us for a conversation. Yes, I got my geek on!

 

It was timely to be reminded of what to expect from the stock market. While I was sitting in the classroom, the stock markets experienced a multi-day temper tantrum, declining rather dramatically.  When the stock market declines, it is natural to feel queasy, like the sensation of cresting the downslope on roller coaster ride.  In particular, the recent declines may feel particularly uncomfortable as many of us still remember the last bear market of 2007 to 2009 and/or we have been lulled into thinking that the stock market increases we have experienced between 2009 and 2017 are the new normal.

 

Reality is that we will only know for certain in hindsight whether or not this recent decline is just a multiple day market decline, a stock market correction, or perhaps the beginning of a bear market. And, while it is easy to conceptually know that the stock market and the bond market goes up and comes down, it is much harder to face that fact when it goes down. We have all heard the adage: SELL High and BUY Low. Our rational understanding is put to the test when the markets decline; as human beings our emotions take over and many of us envision unfulfilled dreams and goals because we have less money.

 

Let me remind you or share with you (as the case may be) that based on the research, using the most reliable data, beginning in the 1920’s (for the US) as initially gathered via the Centre for Research and Security Prices (CRSP), founded in 1960, that:

• The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation.
• Stocks outperform bonds over long periods of time, albeit with greater levels of variability (often referred to a risk).
• Holding securities across many market segments can help manage overall risk. But diversifying within your home market may not be enough. Global diversification can broaden your investment universe.
• Investors often make strong inferences and make decisions based on deceptively little information.

My words of wisdom… When you feel compelled to take action (sell) during a market downward – DON’T! Instead, focus on what you can control:

• Follow your wealth strategy.
• Spend your money consciously.
• Keep cash on hand for your major expenditures within the next 18 months.
• Follow you investment strategy – it was designed to fit your needs and your risk tolerance.
• Diversify globally – As of December 31, 2017, Canada represents only 3% of the world equity markets. {Source: Matrix Book 2018(CA)}.
• Manage investment costs (i.e. MER, Trading costs, Turnover costs, and Taxes)
• Stay discipline throughout market ups and downs.

Do you have a wealth strategy? Are you spending consciously? Do you have an investment strategy? Are you interested in talking about an approach to investing that incorporates the brilliance of a Nobel Laureate?  Let us know. Email us here and let’s start the conversation.