Investment Focus | Issue 14 | Should I be worried right now?

Many investors have worries and questions about the global stock market’s decline.  These emotions are totally normal.  There is a whole field in investing called “behavioural finance” that studies how we react to market movements, the biases we are subject to, and the decisions we make based on emotion.  We know from studies that we feel the pain of a loss doubly to the joy of a gain.  So, naturally some want to eliminate the chance of any further loss.

What does that behaviour result in?  We know that the average investor earns approximately 1.7% less than the market over a period of 20 years.  Why is this?  It stems from emotions causing people to invest more when the market goes up, and pull money out when the market goes down.

Source: PIMCO – www.pimco.ca/en-ca/resources/video-library/media/behavioral-science-in-uncertain-times

This is akin to running to the mall every time the price of something goes up, and then returning the merchandise when it is on sale—but you are returning it to a store that will only give you the sale price back. This irrational behaviour causes investor market returns to be substantially less than historical stock market returns.

Source: www.miraeassetmf.co.in/knowledge-center/importance-of-investor-behaviour-in-market-correction-greed-and-fear-cycle

Bottom line, we should never make investment decisions based on emotion.  We should be sticking to the plan and only changing the investment mix if the plan changes.  The media headlines are noise meant to grab your attention.  Current issues such as rising inflation, rising interest rates, fiscal and monetary policy, and reduced earnings projections all have a short-term impact on the markets.

Rolling 1YR – 3YR – 5YR – 10YR – 20YR – 30 YR Returns of the S&P/TSX (Canadian Equities) 1981 to 2021

Source data: S&P/TSX Rolling 1-,3-,5-,10-,20-,30-year average annual returns from Jan. 1980 to Dec. 2021.

No one knows how this will play out 6 months to a year from now. What we do know is that if we look at our portfolios in 5 years’ time, the overwhelming odds are in our favour that the value will be higher than it was at the beginning of this year before the decline.  The chart below shows historical returns of Canadian equities.  Over 5 years, the worst the Canadian market has every done was -2%.  When you add in fixed income, there’s never been a negative return in a balanced portfolio (based on a 5-year rolling period.)

We understand the worries as our own portfolios are down along with yours.  Our advice for ourselves and for our clients is the same.  Stay the course, avoid the headlines, and don’t look at your portfolio value every day.  Don’t reduce your wealth by making decisions based on emotions.

Please feel free to reach out to us if you would like to discuss your investment plan or any worries that you might have, and we would be happy to talk with you.