"Wait for the right moment"
It’s common to think that timing the market with your annual savings is critical to the long-term success of your portfolio. Despite what many people think.
As an illustration, over a 30-year period, if we compare the results that would have been obtained by the "market timing champion" vs. an "unlucky investor" the difference is only 1.1% per year. Similarly, when comparing the results of the "champion" vs. an "investor who would have systematically saved at the beginning of each month", the difference is less than 1%.
How can this be? Simply because the return on a short horizon is not significant in the long term. What really matters is investing regularly over the long term, not the short-term whims of the market.
Data via Refinitiv. *Annualized money-weighted rate of return.
“Selling in times of uncertainty can protect investments from major losses"
Selling in times of increased uncertainty is often one of the worst actions investors can do to their portfolio. It means selling at a low price and missing the market rebound after a sharp drop in stock prices. More importantly, you should keep in mind that the only certainty is that there will always be uncertainty, as it is the price to pay for capital appreciation in the long run.
We can also see that financial news is presented in the media without always providing a historical perspective. A lot of the short-term noise can easily play with many investor’s emotions; this is definitely a way to incur losses in the long-term.
Data via Refinitiv.
It is true that the most turbulent periods for markets are generally connected in one way or another with recessions1. As such, those with eyes riveted on daily stock prices are very likely to experience fear in times of economic downturn.
However, if we step back from market fluctuations and look, at the historical performance of a basic balanced portfolio during the last six recessions; we see that the average return was actually zero. Not something to celebrate, but far from the financial catastrophe many seem to expect. It is clear that recessions are rather rare, having affected only eight of the last 50 years.
It’s not market contractions that investors should fear, but their own fear... or rather the risk of locking in heavy losses under the influence of emotion, at an inopportune moment.
1 A recession is a time of economic contraction. Generally speaking, a recession is said to occur when gross domestic product (GDP) declines over two consecutive quarters.
Data via Refinitiv.
"Are GICs risk-free?"
While Guaranteed Investment Certificates (GICs) are indeed considered among the safest investment vehicles, depending on the economic context, their performance does not always cover inflation.
When interest rates are low, as was the case from 2009 until very recently, GIC holders who wanted to at least maintain the purchasing power of their assets were more likely to see it diminish. Whereas in the 1990s, a one-year GIC ensured income beyond inflation.
The choice of investment vehicles is intimately linked to the risk tolerance and investment horizon of each individual and, of course, the economic context. Taking these factors into account, the investor’s risk will be linked to the short-term volatility of other assets or to the potential erosion of their purchasing power over the long term. Depending on the context, a GIC can indeed be an excellent choice.
Data via Refinitiv. *35% S&P 500, 35% S&P/TSX, 20% MSCI EAFE, 10% MSCI EM; all in CAD. **60% Equities, 40% Fixed Income ***100% ICE Bofa Broad Canada Universe.
"Are rate hikes bad for stocks?"
Stocks generally perform poorly when central banks hike their policy rate.
Each rate hike cycle has its own set of circumstances that often bring additional volatility to markets. What normally prompts central banks to raise their policy rate is an economy that is showing strength, a typically favourable environment for stocks.
For example, since 1996, the S&P/TSX return has averaged 5.8% in years when the Bank of Canada has raised its policy rate at least once, which is actually lower than the usual average of 9.1% during that period, but still largely positive.
These historical trends do not exclude the possibility of significant declines in exceptional circumstances for a specific period. Nevertheless, over the long run, odds remain in favour of patient investors, regardless of the ups and downs of policy rates.
Data via Refinitiv. *1 hike = 25 bps net change in policy rate.
Things to remember
In times of high market volatility, investors' emotions can be shaken. Following through with your investment plan can be a challenge.
It is therefore important to remember and apply these basic principles in order to maintain proper behaviour regardless of the context:
- Keep a long-term perspective
- Maintain a strong portfolio management discipline
- Stay invested and stick to your investment objectives
- Get advice from an investment expert
- Recognize that investors are first and foremost human beings
Taking a commonsense approach is the best way to take care of your finances and investments in a disciplined and knowledgeable manner at all times.