Ian Tam: The last few days have been quite the ride for investors worldwide, with endless headlines about the coronavirus and a surprise rate cut from the U.S. Fed as well as the Central Bank of Canada to protect the economy. This is truly a challenging time for investors. Here are three things to remember to help you navigate the sea of news.
Number one, keep your emotions in check. Having an unemotional approach to your investments is truly the most challenging feat, but a necessary one to help you avoid making the worst possible decisions at the worst possible times. A good financial advisor can be an excellent resource and coach to help you through these investment decisions during these turbulent times.
Number two, use the volatility that you’ve seen in your portfolio over the past week as a gut check. If you feel that your portfolio value has fluctuated too much, that probably means that you’re taking on too much risk. Consider using all the attention and energy that the market turbulence has brought out in you to take the time to reconsider your risk tolerance and recalibrate your long-term asset allocation decision, or the mix between stocks, bonds and other asset classes, and ensure that it’s appropriate for the level of risk that you can comfortably take on as opposed to making a short-term tactical change in your portfolio.
Number three, do not try to time the market. Although it sounds easy, pulling out of the market and then waiting for a correction is something that very few people and investors can do effectively and consistently. My colleagues, Dr. Paul Kaplan and Dr. Maciej Kowara have authored a few papers around this topic. For one, they ran a study of about 304 Canadian equity funds over a 15-year period ending October of 2018 and found that on average, there were only eight critical months of performance that a fund’s history depended on to beat its own benchmark. Of course, if you weren’t invested during those critical months, you too would have failed to beat the benchmark.
So, investing early and staying invested over the long term is really the only way to ensure that you catch these critical months. Remember that the path to financial freedom is a marathon and not a race.
For Morningstar, I’m Ian Tam.