Veering off course from a carefully thought-out plan can turn a temporary loss of confidence into a realized loss on an investment portfolio. Investors who maintain perspective and stay mindful of their investment time horizon have a better chance of reaching their investment goals than those who react to short-term market fluctuations.
Staying invested and trying not to “enter and exit” the markets when volatility increases can help reduce fluctuations over the long term. The longer an investment is held in a portfolio, the less chance it has of incurring a negative rate of return. This is because fluctuations in value tend to smooth out over time as the impact of market volatility diminishes.
History shows that by maintaining discipline and perspective during market downturns, a patient investor will often be the one rewarded when markets return to an upward path.
As market volatility increases, investors have a natural tendency to want to move into safer investments, hoping to avoid further losses. However, this move can result in needlessly locking in losses on investments that, given time, are likely to recover. A key to overcoming this emotional reaction is to refrain from trying to time the market. Selling at the wrong time and missing just a few days of a market recovery could have a significant long-term impact on your portfolio.
Asset Class Diversification
No one can reliably predict how a particular asset class will perform in any given year. Financial markets do not move in concert with one another. Individual asset classes (cash, fixed income and equities) will perform differently in any given year, and at any time one asset class may be leading the market while others lag.
The table below shows relative performance of some of the more popular asset classes in Canada over the past 10 years. As you can see, there were years when equities led market returns and years when fixed income led the market. There were also periods when a market leader from one year underperformed all of the other asset classes the following year. You will also see times when the lowest performer from one year went on to lead the market the next year. Cash has never led the market in any one-year period over the past decade, however, it is also the only asset class to have never experienced a negative return.
Markets will always go up and down in the short term. Investing in a diversified mix of equities, fixed income and cash can help steer you through every market condition and help protect you from short-term market declines. Assets that increase in value can compensate for others that may be standing still or decreasing, thereby helping to reduce risk and smooth out the returns in your portfolio over the long term.
We can review your individual investment goals together, to help you establish the right asset mix based on your needs.