December 19, 2018

Strategies for dealing with market volatility

A man swipes on his mobile phone while holding what looks like a credit card. A man swipes on his mobile phone while holding what looks like a credit card.

Market swings can be unnerving when it comes to your money. And when you’re worried, you want to take action. Instead of being worried, the best course of action is to be prepared.  The good news is that there are strategies for dealing with market ups and downs. Strategies you can follow to ensure you haven’t taken on too much risk, and that help you focus on what matters when your news feed is filled with dire messages about tanking markets.

“The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions.” – Seth Klarman.

Focusing on the long game

Market volatility is inevitable. It is part of normal and healthy market behavior. Just like seasons, markets move through stagesOpens a new website in a new window of growth, slowing down and speeding up. Unfortunately, the timing of those cycles are unpredictable. While dramatic moves in the market can make you question your investment plan, it’s important to remember not to panic. When the market does dip, the historical facts show that eventually it always comes back even stronger.

While, it’s natural to want to insulate your portfolio after a market decline, it also raises the question of when to get back in. As shown in the below chart, here is why it doesn’t work successfully for most investors. By missing the best weeks in the market, investors greatly affect their potential returns.  For example, an investor who stayed invested in Canadian equities over 20 years would have seen their $10,000 investment grow to $39,690 (total return). If that same investor, missed out on the best week, their $10,000 investment would only have grown to $34,891. Keeping focus on your long-term investment goals can help drown out the media noise around falling markets and help prevent you from making rash investment decisions that don’t follow your carefully laid plans.

20 years of the S&P/TSX: You can’t afford to miss the best weeks

Data note: Uses total returns, on a weekly basis, from Dec. 28, 1997 to Dec. 30, 2017.

Asset allocation and being diversified

Diversification is a bedrock technique for mitigating risk. Holding a variety  of investments can help lower the emotional impact of panic or fear if one of those investments gets into trouble. Over the long-haul, stocks are seen as offering the most potential for increasing in value. However, there’s a reason you read about stock markets shooting up or plunging down – stocks also have more risk. They are an extremely common investment in Canada, but for most people, they are not the only asset class you’ll want to hold in your portfolio. In order to create a portfolio with stable returns, you’ll want to expose yourself to more than one asset class because you can’t predict which one will do best year-over-year. Many people also invest in bonds, which are typically less volatile but offer less potential for returns, or other assets such as cash, government bonds or money market instruments, which offer very little lower volatility alongside very little return.

While the mix of these different asset classes in your portfolio is called diversification, choosing an asset allocation that makes sense for your own financial situation including how old you are, what kind of returns you need (and when) and how much risk you can handle is crucial.

Your asset allocation strategy can vary from a portfolio full of startup stocks with big potential for growth to socking away all your money in a high-interest savings account. (In that case, your investment growth may struggle to keep pace with the rate of inflation)  The ideal asset allocation is probably somewhere between the above two extremes. A trained investment professional can help you align your personal financial goals with your investments. Having a sound investment plan will help you focus on the long-term despite short-term changes in the market.

Reviewing your investment plan regularly and sticking to it

Do you have an investment plan? If you do, great. That’s half the battle. The other half is remembering to review it, update it and most importantly, to stick to it.

Determining your asset allocation is only the beginning of a properly managed portfolio. Over time, a portfolio can become distorted, especially when equity components outperform fixed income-investments.

An advisor can help with all of this and the value of talking to an expert can’t be overstated. Not only will they help you stick to your investment plan, but there’s also a good chance you’ll notice an improvement in your investments over time by remaining with an advisor. Those that used an advisor for more than 15 years saw their investments grow by more than double than those that had one for four years, according to a study.1

Rather than trying to guess what the market will do, your advisor will help ensure that your investments are primed to be in the best position possible when it does move.

In summary

Markets fluctuate over time and it’s impossible to predict when exactly stocks will begin to drop, but we know it is inevitable that they will. Talk to an advisor, who can help you stay on course during times of market volatility.

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Talk to an expert

Not feeling confident in your finances? You can talk to one of our financial security advisors who will work with you to craft a financial plan tailored to your needs.

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