Five timeless tips to navigate market volatility
Good news for your portfolios might be hard to come by right now. Nearly all markets are down so far this year, and the headlines are mostly negative on the topics of inflation, rising interest rates and the ongoing war in Ukraine (more on these later).
We want to help you answer two key questions that may be keeping you up at night: 1) What is causing all this volatility? and 2) What can I do about it?
We've been helping Clients with their investment needs since 2008, through market ups and downs. So it's important to us to share some perspectives that may help you navigate through volatile times.
1) What is causing this market volatility?
We asked Craig Maddock at 1832 Asset Management Inc. about some of the drivers for the current volatility we're seeing. Maddock is the lead Portfolio Manager for the Tangerine Global ETF Portfolios and Tangerine Socially Responsible Portfolios.
“The markets are experiencing volatility. There's no denying that," Maddock says. "This is part of normal market behaviour. While the spike caused by recent events may feel new, you can see similar spikes are common when you look over a longer period."
The chart below can offer some perspective. It tracks the VIX Index, which is a volatility measure for U.S. equities. A higher VIX number reflects a higher expectation of market volatility. You can see the two biggest spikes in the chart corresponding to the 2008 financial crisis and the onset of Covid-19 in early 2020.
Source: Google Finance, as of May 11, 2022
Volatility has been on the rise lately, thanks to several economic conditions:
A) Inflation. Consumer prices jumped 7.7% on a year-over-year basis in May. Concerns over corporate earnings and the impact of increasing costs have likely lowered equity valuations and contributed to elevated market volatility.
B) Rising Interest Rates. On July 13, the Bank of Canada hiked the overnight rate to 2.5% and has signalled more rate increases to come.
C) Uncertainty from the Russia-Ukraine War. Markets generally decline when there is geopolitical risk, however these impacts have historically been short-lived.
2. What can I do about it all?
Many of the driving factors are outside our control or ability to predict. But there are some elements we can control, in order to keep our finances — and emotions — in check:
A) Have a plan. Without an investment plan, we leave ourselves susceptible to a roller coaster of emotions whenever markets become volatile. This can translate into poor short-term decisions. Having a plan for the long term can help put the present in perspective.
B) Don't avoid risk — manage it. Investing in the stock market and risk are a package deal. The key to long-term success is to manage your risk using a combination of time and diversification. In this chart1, you can see that in the short term, even a balanced portfolio (with diverse assets) has a wide range of potential return outcomes. But the longer you invest, the less exposed you are to negative outcomes.
Source: Investments Illustrated, Inc., The Big Picture, 1935 – 2021. Balanced Portfolio Allocation: 10% Cash, 20% International Stocks, 20% U.S. Stocks, 20% Canadian Stocks, 30% Bonds. Assumes a $10,000 initial investment and reinvestment of all income and no transaction costs or taxes. All returns are compound annual returns. “One Year" is based on the best and worst one-year periods since 1935. “Five Years" is based on the best and worst five-year periods since 1935.
C) Invest regularly. When you automatically invest a fixed dollar amount on a regular basis, it's a built-in discipline that can help you avoid second guessing your plan. On top of that, since you naturally end up buying more units when prices are low and fewer units when prices are high, this is one way you can actually take advantage of market volatility — while keeping your emotions out of the equation.
*Assumes a monthly $100 investment, growing at 5% annual returns. Assumes reinvestment of all income and no transaction costs or taxes. All returns are compound annual returns.
D) Keep fees low. In volatile times, revisit the value you're getting from higher cost investments. While a fee of 2.02% may not seem like a big deal, that equals more than $200 for a $10,000 investment. That fee can magnify short-term losses and really add up over time.
*Assumes a $10,000 investment, growing at 5% net return and a 2.02% fee. According to the Investor Economics Insight report dated June 2021, the asset-weighted MER for A-series mutual funds for the year ending December 2020 was 2.02%. Assumes reinvestment of all income and no transaction costs or taxes. All returns are compound annual returns.
E) Stick to the plan. No one can perfectly time the ups and downs of the market, and sitting on the sidelines can be costly. Staying invested can translate to a better outcome.
Source: Bloomberg. S&P/ TSX Composite Total Returns Index, December 30, 2011 to December 31, 2021. It is not possible to invest directly in an index. Assumes reinvestment of all income and no transaction costs or taxes. Value of investment calculated using compounded daily returns. Missing 10 best days excludes the top 10 return days during this period.
While the news might distract us with short-term movements, this noise can throw us off track from focusing on our long-term approach. Remember: you're investing for the long run. Markets rise and fall, but a solid plan is timeless.
1Disclosure: The charts above are for illustrative purposes only. Past performance is not an indicator of future performance. All values are expressed in Canadian dollar terms.
Remember, our Investment Funds Advisors are here to answer any questions and guide you on reaching your investment goals. Feel free to call us at 1-877-464-5678. We're here Monday to Friday from 8 am to 8 pm ET.