This time, it’s different

We are truly living in a strange new world. Not only have our societal interactions been greatly limited and our daily routines thrown out the window, but two very important elements that are at the heart of our security and well-being are under attack at the same time – our health, and our finances.

For some people, your income from work or business may be at risk, or has been greatly affected.   But not only is it peoples’ income and livelihoods that have suddenly been put in jeopardy, but investment portfolios have also been greatly affected by falling financial markets. When people are worried about their investment portfolio, they are at risk of making the biggest investor behaviour mistake:  Panic selling. You may not feel it is a panic; you may justify it to yourself as a rational evaluation. But if you have built a portfolio with a blend of assets for the long-term and suddenly change that allocation dramatically, it is an impulsive move.

If you are nervous about your investments, here are some interesting facts to keep in mind:

  • On average a bear market lasts 14 months.   (A bear market is defined as a market decline of greater than 20%)
  • History has shown that the faster the index falls into bear market territory, the faster the recovery.  By far this has been the fastest fall into a bear market ever.  On average it takes 270 days to fall into one, this time it happened in the space of just a couple of weeks.

Now, you might be saying this time is different.  Yes, it is different. We are in the midst of a global pandemic.  But that is simply the reason, the trigger if you will, for why the global economy will most likely experience a recession (and why the markets reacted the way they did).   And guess what; pretty much every time a recession is entered the root trigger is different.  What is remarkably the same is what comes after.  Historically, never have the markets not recovered, and never before have they not hit new highs.  In fact,

  • 12 months after the low of the bear market, the average return of the S&P500 (major US index) has been over 40%.
  • For those who sell in a panic, they often miss out on the best days of market returns, and the best days often happen very close to the worst days. Like March 13 and March 23.
  • Over the past 15 years $10,000 invested in the S&P 500 would have experienced growth of over $20,000. If you had missed just the best 10 days, that growth would be just over $10,000.   Over various periods, and for various different indices, the results are remarkably the same – missing out on just the best 10 days over a 15 year period results in dramatic reduction of returns.

Research shows that people lose confidence in part because they suddenly feel that they do not have control.  And while we can’t control the markets, here are some things you can control:

  • Your goals – if your anxiety comes from the feeling that there will not be enough money to fulfill your plans, see what choices you can make to alter those plans. Choose to skip a vacation or take a less expensive one. Decide to hold onto your car year or two longer. Chances are, the market will recover and you will be able to fulfill the plans you already made but making these choices can help you feel you have a plan that still works.
  • Rebalance rather than cash in.   Things have changed and your investments may also need to change.  Repositioning and / or rebalancing your investments may be appropriate.  This may even be a good time to buy stocks at a much lower price.
  • Confirm your Investment Strategy is right for You – If you are tempted to sell, it may be that your portfolio isn’t aligned with your risk tolerance, or, that your portfolio isn’t designed to do what you need it to do.   It is your advisor’s job to confirm you have the right portfolio design and to reassure you of that. If you are doing this on your own, this may be the time to consult with a professional.

In any case, this is an important time to be in touch with your financial advisor.  They are your guide and have the responsibility to help you navigate these difficult times.  They are there to help you make sound, smart financial decisions given your personal circumstances.  Remember, just because the terms self-isolating, quarantine and social distancing are now part of our everyday language, it doesn’t mean you have to do this alone. Stay connected with your advisor. Sometimes just talking through it can give you the confidence to avoid the impulse to run away from markets.

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