Market volatility can test your resolve as an investor. Asking yourself a few key questions can help keep you on track to your goals and avoid common investment pitfalls.
Volatility is a normal part of the investing. The equity market’s performance since the “COVID Crash” of February-March 2020 is a great example. Despite the unprecedented challenge of the pandemic, not only did equity markets quickly recover their losses, they went on to deliver strong gains. From February 2020 to September 2021, the S&P 500 Index generated a total return of almost 40%, or over 23% when annualized.*
Recently, however, the “wall of worry” is growing taller and volatility has returned. Some of the concerns include:
- fears that the ongoing pandemic will substantially slow the global economy
- growing supply-chain-driven inflation
- rising interest rates and bond yields
- the eventual end of the extraordinary government fiscal and monetary support intended to cushion the economic damage of pandemic restrictions
Climbing down the wall of worry
Any time volatility strikes markets, it’s easy to climb a “wall of worry” – and make decisions that take you off-course from achieving your investment goals. To avoid making hasty decisions that might end up costing you, here are three questions to ask yourself:
- Have my goals changed? Your investment goals are the most important part of your investment plan. They’re the reason why you’re investing in the first place. Still investing for your newborn’s post-secondary education in 17 years? Or for your retirement in 30?
- Has my risk tolerance changed? It’s normal to worry during times of market volatility. But it is important to consider that our risk tolerance is a gauge of our willingness to tolerate unpleasant negative emotions from time to time in order to achieve higher potential long-term returns.
- Has my risk capacity changed? Risk capacity is a gauge of your ability to suffer investment losses – or, what risk you can afford to take. This reflects factors like your financial circumstances and how long you have to invest – in other words, your ability to wait out down periods in markets in order to capture higher long-term potential returns.
Every investor is unique, and your life and financial situation can change over time. That’s why it is important to review your investment plan with us periodically or when a major life change occurs. This way, when volatility hits markets, your plan is there to help to guide you through difficult times and keep you on track to your goals.
*Source: Bloomberg. S&P 500 Index data from February 1, 2020, through to September 30, 2021, in U.S. dollars, before transaction costs, commissions and taxes. Note that past performance is not indicative of future returns and you cannot invest directly in an index.
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