Investing during volatile times can challenge your discipline and commitment, but there are principles for your investment strategy that can help ease your mind and keep you focused on the long term:
- Diversify your investments to help spread risk, remain more consistent, and reduce potential for underperforming assets to impact your portfolio.
- Stay the course and be committed to your long-term investment plan — don’t be tempted to ride the emotional rollercoaster.
- Don’t panic and jump ship. The difference between investment success and disappointment can boil down to a few days of being in or out of the markets.
- Look back at history and take a long-term perspective. Markets rise and fall but, over time, markets have always moved higher.
- Invest in small increments and use the market volatility into your advantage. By investing a specific amount at regular intervals, dollar-cost averaging can help you buy more units of an investment at lower prices and fewer at higher prices. This will help with making a single lump-sum investment at the wrong time.
With volatile markets it is easy to impulsively hit the panic button. This often leads to making bad decisions.
We know that history has a way of repeating itself although not always in the same way. While this pandemic is a first for all of us ups and downs in the markets are not. We do know that the investments always come back. Warren Buffet has long maintained: investors should be “be greedy when others are fearful and be fearful when others are greedy.” It is impossible to know when the stock markets will reach the bottom. We can look at history to have a point of reference. This table shows the previous 11 largest Canadian stock market corrections since 1968 including dates as well as the time frame, duration, and level of decline. The average length of these bear markets is 13 months, with a standard deviation of 6 months. While these decline metrics appear normal for traditional economic correction-based situations; the current market downturn was the fastest decline of 30% or more in the past 100 years – 22 days! Given the speed of this decline and the potential for clear indicators of bottoming emerging; this recovery will hopefully begin much faster.
|Range of Decline||Months||% Decline|
|April ’69 to May ‘70||14||-28%|
|Sept ’73 to Nov ‘74||15||-36%|
|Oct ’80 to May ‘82||20||-43%|
|Nov ’83 to June ‘84||8||-16%|
|June ’87 to April ‘88||11||-19%|
|July ’89 to Sept ‘90||15||-23%|
|Dec ’93 to Dec ‘94||13||-12%|
|March ’98 to July ‘98||5||-28%|
|July ’00 to Aug ‘02||26||-45%|
|May ’08 to Feb ‘09||9||-43%|
|April ’15 to Jan ‘16||9||-19%|
In order for us to know when the market has hit the bottom and is recovering three criteria must be met:
- The viral spread must begin to slow down so the ultimate economic impact of the virus and containment efforts can be properly understood.
- There must be evidence that extraordinary measures taken to support the economy are sufficient.
- Investor sentiment and positioning must bottom out.
As investor’s become more confident in the market, they will indeed begin to take advantage of the lows but the market will continue to be volatile. We can’t predict the timing of recovery and it may not be evident till after the fact.
Bear Markets normally occur in three stages:
- When there is a positive run a few shrewd investors recognize that at some point the bull market will not always be that way.
- Most investors will recognize the economy is deteriorating
- The consensus is that things can only get worse (sometimes missed if the correction is immediate)
Bull Markets occur in three stages as well:
- A select few forward-looking investors begin to believe things will get better.
- The majority of investors realize the markets are improving
- Investors become sure the markets are getting better and take on the forward- thinking for themselves.
Whatever the actual date of the current selloff’s bottom, it will occur and when it does a rally will ensue. Just as there have been 11 bear markets, they have been followed by 11 bull markets. By using month end data for these 11 rallies in the S&P/TSX index from 1968, this chart shows that on average the S&P/TSX index returned 28.7% in the 12 months following the market bottom. The recoveries have been as little as 12.9% and as large as 79.0%.
At some point, we will reach the bottom and when it does a rally of investing will ensue.
The bottom line is until there is more certainty regarding the future, we have no way of knowing if the markets have reached the bottom. If they have it will remain volatile until confidence returns. In the past stock markets tend to temporally decline after the initial rebound, as investors take in market gains.