Timeless advice, not the news of the day, should guide decisions during the current downturn
For more than a decade, it seemed as if nothing could stop the rise of the stock market. But with the arrival of a once-in-a-century pandemic, everything changed. Many Canadians watched their income streams and retirement dreams evaporate overnight, and now are understandably panicked and emotional.
But as Robert Armstrong, director, Multi-Asset Solutions at BMO Global Asset Management would like to remind investors, it’s more important than ever to take a long-term and rational view.
“The volatile market sell-off is a reminder of just how delicate the stock market can be,” he said.
While there’s no telling how deep the current stock downturn will go or how long it will continue, Armstrong emphasized that investors won’t do themselves any favours by constantly watching the news for signs of a turnaround. Since practically all media coverage during downturns will involve negative events, they’ll only end up more anxious and susceptible to making poor decisions.
“No one drives up to your house and tells you how much it’s worth each day, and you should treat your investment portfolio the same way,” he said.
The current downturn may seem overwhelmingly discouraging, particularly for those whose portfolios experienced a significant drop in value despite being well diversified. But they might be able to take some comfort from the fact that, as harsh as things may appear, it’s actually all just a case of history repeating.
“Between 1980 and 2019, for example, there were 9 bear markets in stocks, which are defined as declines of 20% or more; corrections, or declines of at least 10%, totalled 15,” Armstrong said. “Unless you sell, the number of shares you own won’t fall during a downturn. Staying invested and reinvesting income and capital gain distributions will allow you to participate in the gains during market recoveries, which should revive your portfolio in the long run.”
Be greedy when others are fearful
Broadly speaking, market volatility also creates prime opportunities for future portfolio gains. Assuming one continues to add to their investments and rebalance to their strategic weights during down markets, they’re more likely to see for themselves that, on average, equities have higher returns over time than other asset classes.
“One of my favorite strategies comes from comments made by Warren Buffett during lows of the 2008 bear market,” Armstrong said. He quoted the Oracle of Omaha’s simple maxim to “be fearful when others are greedy, and greedy when others are fearful.”
Historically speaking, some of the best trading days have occurred when markets were under pressure. Assuming an investor’s portfolio is well-diversified based on their risk tolerance, long-term financial goals, and investment time horizon, Armstrong said there’s no reason for them to retreat to cash.
“Even the most optimistic long-term investor should understand that the stock market doesn’t rise in a straight line,” he said. “As a matter of fact, individuals with a long-term time horizon may want to consider buying within their RRSPs or TFSAs, since they can earn significant gains in the recovery on a tax-deferred basis.”
Stay focused on the future
But to avoid sabotaging their future success, investors need a long-term plan, which Armstrong stressed is particularly crucial during downturns. “Now may be a good opportunity for people to review their target portfolio asset allocations with their financial planners,” Armstrong said.
A strategic investment plan, Armstrong said, is important for investors to engage in portfolio rebalancing without falling into traps. In the midst of volatility, it’s much too easy for people to get tempted into return-chasing or reacting to “head fake” market events, which are likely to lead to more losses.
“When asset prices fall, some investors may even overreact by selling riskier assets and moving to government securities or cash equivalents,” he said. “Or they may embrace the familiar, such as the ‘home country bias,’ by moving from international to domestic markets.”
In many cases, a market shock can prove to be a welcome wake-up call when portfolio allocations have drifted too far into risky territory. But Armstrong warned that selling suddenly can be unwise, especially when an investor believes they can time when to move money back into the assets they jettisoned.
“If you sell, have a plan when to get back in,” Armstrong said. “And it can’t be when everything is better, because the markets will have moved by then.”