It has been 10 years since the global financial crisis, and as we pass this anniversary, I believe it is a good time to revisit the subject and remind ourselves of the mistakes we made so as to not repeat them in the future. From September 2008 until April 2009, equity markets fell over 35%. Analysts around the world were calling for the next Great Depression. In Canada, we have always prided ourselves on the stability of our banking sector, however even these stocks hit lows not seen for decades. When I first started at RBC Wealth Management, a senior advisor told me a story about a conference call he was on in March 2009 regarding Royal Bank stock. There was much fear at the time, and the recommendation was to sell all at $26 per share. Looking at this decision from our point of view today, having listened to that analyst in a moment of panic would have been the wrong decision.
If we look back at portfolio returns from this time, I would assume and hope that yours did not fall 35% from its high. The reason for this is because of how portfolio managers hedge risk and down markets with asset allocation. If you were only down 15% during this time period, I would say your portfolio was successful at mitigating one of the worst financial disasters of our time. If you were holding any type of government or global bonds, this should have and would have mitigated much of the downside. Now, let's assume you did not hold any bonds and you were 100% invested in Canadian and U.S equities. Did you sell on the way down to get out of the markets or did you lock in and hold tight until the dust settled?
Much of the decision making during down-markets is based on emotions and not fact. The single factor that can most quickly ruin your retirement is making emotional decisions with your money during times of market distress. These decisions tend to cost you in the long term but seem as if they are benefitting you in the short term. If you were selling on the way down, locking in losses, take a look at the price point of those same assets when you decided to buy back in. More than likely, if you did buy the back in to the same assets at a later date when things had stabilized, you did not buy back in when they reached their lowest point. More than likely, you waited until the assets showed some positive improvement before repurchasing, meaning you probably lost 5-10% of upside.
When I bring this subject up with clients and prospects, I am often asked what I will do when we go through the next episode like 2008. Most likely I will do nothing. We build portfolios that are designed to stand up in turbulent times and mitigate the downside risks of global financial events such as the crash of 2008. I do not take unnecessary risks in my clients' portfolios, because it is more important for me to have clients who can sleep at night knowing their money is safe, rather than chasing the latest hot stock that’s up 300% in a week. If an advisor tells you they can and will get you out of risky assets before a market crisis, they are lying to you. No one can do this, it is virtually impossible for several reasons- namely the fact that most of the largest market crises in history were unanticipated by the majority of mainstream institutions meant to protect against them. The key to success is having a portfolio that hedges risk and is designed to weather the storms of what can, at times, be a volatile market.
If you would like further details regarding how we are preparing for next year, please feel free to contact me directly at 604-257-3225 or firstname.lastname@example.org.
Sincerely, Kyle G. Sarai