Investing can feel like a roller coaster ride. One of the scariest things when it comes to investing is when the market drops, along with your money. Especially if you are the type of person who likes to look at your investment portfolio every day. Your mood literally moves in the same direction as the way the investment markets move.
2016 was an especially tough year. The Canadian Stock market dropped significantly. It was painful for me to watch my own investments going down day after day, and wondering when it will all stop.
But let’s stay calm and take a look at history, because humans have notorious short-term memories, especially when it comes to money.
The Investing Life cycle:
The chart here compiled by Mackenzie Investments shows all the bull markets (when markets go up) and the bear markets (when markets go down). All the bars above the line are bull markets and bars below are bear markets. The way a bull or bear market is defined is if returns are positive or negative greater than 15% that lasts at least 3 months.
As you can see, since 1956, there has been exactly 12 bull markets and 12 bear markets. However, bull markets lasts much longer than bear markets and also gives a much higher percentage change. On average bear markets are more brief, but create tremendous fear.
Many investors panic and sell their investments during these bear markets, hence forgoing the gains that are to come in the following years. And when markets have rebounded fully, these same investors begin to participate and buy into the markets again, because they now believe it’s “safe” to invest again, which is completely false. They are essentially creating a pattern of selling when investments are cheap (bear market), and buying when it’s expensive (bull market) – the exact opposite of what you should do.
This is why investor discipline (i.e not selling investments during bear markets) is absolutely crucial.
You all have a financial plan right? Make sure you have the right mix of assets for your age and risk tolerance. Asset allocation is key when it comes to investing. The younger you are, the more risk you can afford to take with your investments. As you near retirement, your investment portfolio will shift to become more conservative. Asset allocation is essentially the mix between investing in equities (risky) and fixed income (conservative). As long as you have the right asset allocation and mix of investments, based on your age and risk tolerance, what the markets are doing for the short-term should not affect you one bit.
If your investment portfolio starts to deviate from the correct asset allocation because of market fluctuations, all that needs to be done is to re-balance your investment portfolio – which means to sell your investments that have been doing really well and buy some that have gone down.
If you have no idea what your investment asset mix is or whether you have the right asset allocation, consider speaking to a Financial Advisor.