"More money is left behind than lost during market declines."
I read this line in a blog post recently from a company called Carson Wealth Management located in Omaha, Nebraska. The blogger suggested that when an investor reacts emotionally to a market decline they almost always put themselves in a worse position than had they just simply held their positions throughout the downturn.
I feel that this is extremely topical right now as the stock market has just set a new record in terms of the how long this 'bull market' or rising market has lasted. We were on the longest bull market run in history and surpassed the run-up from 1990-2000 which ultimately ended with the bursting of the tech bubble. This news has left many investors wondering, where do we go from here? Well, the best investment minds in the world have come to a consensus. The consensus is they have no clue (See end of article).
That's correct, the best investors in the world don't have a clue where the market goes from here in the short term, and in fact they stopped trying to make those predictions decades ago. Instead, they have learned that by avoiding emotionally charged decisions and remaining disciplined they have been able to remove the impossible task of trying to time the markets.
Emotions Getting in the Way
Staying disciplined can be extremely difficult especially if you are in the public eye. Take for example, the financial crisis. Public consensus was that by the fall of 2009 that the market had stabilized and it was time to get back in. Roughly 6 months after we saw the bottom of the market people began to feel comfortable again with investing. The problem is that the market had already risen by 56% at that point from its March 9th low (S&P 500). Even this year we have seen the potential for emotions to get in the way of making solid financial decisions.
This is not to say that you should not make allocation changes in your portfolio along the way. On our end we assess the risk tolerance of each individual client in order to meet their expectations for volatility so they can sleep at night, while also trying to achieve the rate of return needed to meet their objectives as outlined in their financial plans and projections.
For clients it is our firm belief that their portfolio should be dictated by their financial plan which outlines the family index rate (rate of return) their investments need to achieve in order for them to live the lifestyle they want to. From that perspective when we feel that markets are becoming expensive, we can re-allocate some of our stock/equity positions to lower volatility assets which may not return as much over time but provide us with a safety net if markets crash.
Knowing that a client only needs 4.5% on their investments and is risk averse helps us to remain disciplined to our strategy and our recommendations versus trying to squeeze out every last ounce of growth from an expensive market.
Given the market gains we have seen since the immediate drop during the pandemic it's worthwhile exploring whether or not you are still allocated appropriately for your comfort levels for volatility. Ask yourself, how would you feel if your investments dropped 30% in value over the next 6 months? How would you react to that? If you feel you would lose sleep at night that it is likely time to re-allocate to include more investments with lower volatility and reducing (not eliminating) your assets with higher volatility.
If you answered the same question saying that you would just buy more, than likely keeping your allocation the same may be a good fit as you will not make the mistake of missing out on upside market growth. I would suggest however, that it's easy to say now that you are comfortable with seeing a high level of volatility, it may be a different story when the crash eventually happens.
Sticking to the Process
This record breaking market may be coming to an end, or it may go on for another few years. We simply don't know and nobody does. What we do know is that the best investors in the world have achieved that status by not allowing their emotions to dictate their investment decisions. They stick to their process.
Don't Outsmart Yourself
As an individual investor your portfolio should be dictated by your plan. Know what you need to achieve in order to be successful and have a portfolio designed specifically around your goal. Then, when the next crash comes, refer back to your plan and take comfort in knowing what your long term average return needs to be. Stay disciplined and hang on for the ride, you will end up far better off in the end. Don't outsmart yourself!
-Grant White, CIM, CFP
Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.
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