Article by Marc-André Castonguay for the Times & Transcript May 23, 2019

A few weeks ago, when my daughter had a cold, she asked me for medication, so she would feel better as soon as possible. She was obviously disappointed when I told her that the best medicine for a cold was to rest. “Dad, that’s not a solution!” But a few days later, she was back to her usual cheerful self as she overcame her cold.

It is human nature to want to act now and fix whatever it is that makes us feel uncomfortable. By doing nothing, it feels like we are not addressing the issue. But sometimes, staying the course is the best action to take. This is often the case with investments.

Certainly, many investors feel discomfort when they see the value of their portfolio drop. Late 2018 served as a reminder that market downturns can be sharp over a short period of time. Adding to the discomfort is all the headlines about trade wars, slowing economic growth and tensions in the Middle East. So as an investor, it is normal to ask yourself if you should change your strategy.

Reactionary changes increase risk
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A common reaction to market volatility and negative headlines is to want to reduce stock market exposure in a portfolio. The idea that fuels this reaction is to shelter our investments from further market downturns and reinvest in the markets when “things get better”. This is called market timing and many studies have shown that trying to time the market can be quite costly. To illustrate the risk of being wrong when trying to time the market, let’s look at some numbers. Using data from the S&P/TSX Composite Index (a benchmark index for Canadian stock market) from January 1978 to December 2018, a single $10,000 investment made at the beginning of the period would have been worth $444,456 at the end of the period. However, if we remove only the best 10 months from this 480-month period, the value of the investment at the end of December 2018 would be $152,484.1 Quite the difference! If the investor would have missed the 50 best months, his investment would be worth slightly less than the initial $10,000. If you’re constantly trying to pick when to get out and when to get into the markets, how many of those best months are you willing to risk missing out on?

No one can time markets perfectly. By doing so, you may get lucky once in a while, but odds are that your investment returns will be hurt by making changes in your portfolio in reaction to market movements and headline news. While hindsight is twenty-twenty, looking forward to how markets will react in a few days, weeks or months is much blurrier. The main reason market timing is so difficult is because you have to be right twice. Not only do you have to be right when you get out of the stock markets, you also have to be right when you jump back in. And by waiting for “things to get better”, most will miss the best days of a stock market rebound. A recent example would be the people who sold their stocks in late December 2018 and missed the impressive rebound of early 2019.

When should I consider making changes to my portfolio

Assuming you have an investment policy in place that was built based on your reasons for investing (financial goals), your risk tolerance, your investment time horizon and any constraints you may have, here are a few situations when you should review your investment strategy:
  • Major life events such as marriage, having a child, divorce, retirement or death of a spouse;
  • Loss of a job, or change in employment;
  • Major health event;
  • Financial windfall like the sale of a business, inheritance or lottery win.
Reviewing your investment strategy may lead to changes, or it may confirm that the current strategy is still appropriate. If you don’t have an investment policy in place for your portfolio detailing your financial goals and other elements that will influence your strategy, you should consult a financial planner or financial advisor to help you put this in place, review your portfolio and make any necessary changes to line up with your investment policy.
Even though making changes to your portfolio in reaction to markets and headlines is not recommended, this does not mean that you can’t take action. The first thing you can do is contact your advisor and get some clarity and perspective when you feel nervous or uncomfortable about your investments. Reviewing your investments and reconfirming the reasons why your current strategy was put in place will certainly help alleviate your concerns. Remember, sometimes staying the course is the best action to take.
  1. Source: “Investing for Success: Perspective on market behaviour over the short and long term”, Fidelity Investments Canada.