Trading by headline is a sure way to lose money
Q – I have both mutual funds and exchange-traded funds in a self directed brokerage account. They’ve suffered some pretty big losses over the past couple of weeks. Should I be selling my equity funds and switching to cash to protect my investments in this volatile time? – Asked by J.B.
Not necessarily. First of all, don’t panic! Markets fluctuate and regularly experience periods of volatility. During especially uncertain periods, as we’ve seen recently, it’s best first of all to review your financial plan and revisit your investment objectives to ensure your investment portfolio is still in line with your goals. If it is, then you should be able to ride out the storm.
In periods of strong volatility and economic uncertainty, it may be difficult emotionally to stick to your plan and stay invested. It’s hard to do when all your news, Twitter, and Facebook feeds are screaming about the “market crash.” But remember, panic selling will only leave you with more doubt and fear – doubt that you’ve done the right thing when markets take off again (and they will), and fear that you’ll lose out on the biggest gains, which typically occur early in a rally.
Buying and selling when market gyrations are making headlines only incurs extra trading costs, creates possible tax issues, and dampens your overall longer-term returns. But if you have a solid investment strategy and a good advisor, trust them to do their job.
Sell in haste, repent at leisure
As a self directed investor, you will need to keep your wits about you and stay focused on the long term. Investing is a lifelong process, and if you were to sell every time the markets corrected, the chances of getting back in just before a rally, recovery, or bull market are slim.
This is precisely what happened in October. Toronto’s benchmark S&P/TSX Composite Index lost 5% in value from Oct. 8 to Oct. 15. That correction bottomed out on Oct. 15, and by Oct. 21, the index had rallied 5%. If you had succumbed to temptation and sold at the height of the frenzy on Oct. 15, you would have sold your holdings at what turned out to be the low of that particular selloff. There would have been absolutely no way of knowing that the market would rally for the next week. And by the time you did realize it, and bought your funds back, you would effectively have locked in your losses, and incurred needless transaction fees. That’s no way to run a portfolio!
Keep calm and carry on
Investing takes knowledge and patience. Be calm, stay educated, and make decisions only when you have weighed the pros and cons and are ready to be accountable for the outcome. If you are not sure you are holding the right asset mix and feel that you are overexposed to equities, consult a qualified advisor to see if your asset allocation strategy needs to be altered.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.