What to do when markets seem to go crazy
When stock markets suddenly begin to drop alarmingly as they did at the beginning of February, many investors will contact their brokers and advisors and start selling things. Others, however, seem not to be so anxious, and while concerned, do not “ride madly off in all directions,” as the old Stephen Leacock quote has it. So what’s the difference here? As financial advisors, we see both types of financial personality, more of the former than the latter. What does it take to get yourself into the group that just isn’t as fussed about market setbacks like this?
- Discipline
When you create an investment strategy and build a portfolio to execute that strategy, your objective is to see your wealth grow within your risk comfort zone.
So if you’ve decided on a broadly defensive asset mix of, say, 10% cash, 50% fixed-income, and 40% conservative stocks, it will serve you well. But it will do so only if you have the discipline to stay with it. Your equity holdings will cycle through ups and downs just like the rest of the market. But the income generated from your income holdings will offset that periodic volatility to some degree, because these assets have a kind of built-in risk-reduction function. As a result, your overall portfolio won’t suffer as severely in those inevitable market downturns.
The key to making it work, however, is that you have to stick with it. And that’s where the discipline comes in. When you call your advisor to sell stocks now because the market is “crashing,” you’ve made a fatal mistake in your financial planning. If the asset allocation was good for you before, and the security selections made sense, what’s changed? Are those big blue-chip companies suddenly on the verge of bankruptcy? Will the government default on its bonds? Of course not! But the markets will fluctuate. The discipline lies in making sure you don’t blow up your portfolio at every turn – because you’ll almost certainly do it at the wrong time.
- Patience
Patience goes hand in hand with discipline. The longer you apply your disciplined approach to portfolio management, the more likely you are to meet your objectives for wealth creation, regardless of transient market fluctuations.
Research has shown that stocks consistently outperform virtually every other asset class over the long term. As of Dec. 31, Toronto’s benchmark S&P/TSX Composite Index, for example, has returned an average 7% compounded annually for 20 years, as of Dec. 31. The important principle here is that you’d have made that return only if you’d stayed in the market. And you’d have done that only by exercising patience.
- Prudence
You will never achieve your wealth objectives and financial stability by investing in hot tips or selling whenever markets get volatile. Once you establish your financial objectives, define your true risk-tolerance level, and decide on an appropriate asset mix, you need to select individual assets.
You’ll want to do research on any equities or fixed-income securities you want to put in your portfolio – and many self-directed brokerages have excellent online research and financial analysis tools to help you do just this. Prudence means knowing what you’re investing in, knowing the history and the outlook of any company you want to buy. But if market research isn’t your favorite pastime, hire the expertise. Ask your financial advisor who they use for asset management and what their financial management philosophy is. Get the facts and figures and proof of performance. If they can’t or won’t, find someone who will.
When you’re comfortable that you’ve set up an investment plan that follows the principles of discipline, patience, and prudence, you’ll find that your anxiety level about the latest craziness in the markets has gone way down. And your confidence in achieving your financial goals has gone way up.
© 2018 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.
