By now we may have experienced an “official” bear market which is defined as a temporary correction in the equity markets of 20% or more. As always, at this point in the market cycle, with fear in the air…there’s lots to debate and little to resolve. There are, however, common features of bad markets that are irrefutable and are worth reviewing to help us stay on course.
- As we state often, nobody has a clue where markets are going at any point in time. There are too many factors driving stock prices, only a fraction of which show up in media and research reports. In more volatile, emotional times, however, commentators and investors get more confident for some reason. You may hear or feel things like, “This market is definitely going lower. I can feel it.” Or, “We’re at the bottom and I’m buying.”
Everyone becomes an economist in bad markets and tends to forget what they don’t know. Don’t be that person!
- Weak markets are a necessary part of investing. Investors can’t benefit from the good times, like the last nine years, without also going through tough periods. The dips only hurt long-term returns when you let the market take over the management of your asset mix. The old age buy low and sell high only apply if you let the investment managers do their work. If you or your portfolio manager hasn’t done anything to your portfolio in the past few months, then your asset mix has changed. Stocks have decreased as a percentage of total assets due to price declines, while cash, GICs and bonds have increased. Mr. Market has made this change without being asked. To prevent it, you either need to do some rebalancing (which we or our managed portfolios do for you) or use contributions and withdrawals to get your mix back to what was intended.
Don’t sell low and buy high!
- What’s the plan? With fear in the air, we have noticed over the last 20 years that people tend to trust their investment plan the least when they need it the most. Down markets have the most potential to impact your returns, good and bad. It’s not the time to toss out your strategy and cede control of your portfolio to your emotions.
It’s human to trust your investment plan the least when you need it the most. Now is the time to stick to your plan.
- Markets overreact to short-term news and macro-economic concerns.
The reality is, the long-term value of a diversified portfolio changes very little with the news of the day. Companies are valued on their future stream of cash flow and dividends. The next few years, let alone few quarters, account for a small part of that value. New information may increase or decrease the long-term potential for an individual company, but it’s much harder to move the dial for a broad mix of businesses. The implications of this concept are profound — when stock prices go down more than is justified by a change in fundamentals, the projected return of the portfolio goes up. In weak markets investors should be raising their expectations for stock returns, not lowering them as is so often the case.
Risk decreases as markets fall and future expected returns increase. Remember this!