We all wish the stock market would move only one way - up. Unfortunately, history has shown us that every bull market is followed by an aggressive bear market. Sometimes the market falls hard and fast, but that does not have to mean catastrophe. Anticipating the bear markets and being smart when times are tough can historically be just as lucrative as being smart when the going is good. After all, the smartest investors do not react emotionally in a downturn, they take advantage of it by making sure they are in a good place when it corrects itself.
"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful"
— Warren Buffett
Aspects to Remember
Do Not Panic
Nobody likes losing money. The thought of losing 20-40% of your hard-earned savings is unavoidably stressful, but the worst thing you can do when the markets go down is panic. Fear can drive you to make irrational choices that could end up costing you significantly.
Do Not Ignore History
Historically, upturns in the markets have always lasted longer than downturns in the markets. As per Morningstar, the average bull market lasts 97 months, while the average bear market only lasts 18 months. Fluctuations are a normal part of the investment world and should not be a cause for concern. As long as you are patient and stick to your plan, there is plenty of time to recover and reach new heights after a loss.
The Risk of Market Timing
If you have a strong portfolio that is filled with solid investments, the best option is usually to leave it alone and let it ride out the volatility. Be wary of trying to time the market. Attempting to sell in anticipation of a significant market drop could result in selling too soon and potentially missing significant returns; on the other hand, if securities are sold, the decision to get back into the market could either be premature or too late.
Ignore the Noise
The media loves to depict a "doom and gloom" atmosphere when there is a downturn in the market and it can sometimes be hard to ignore. Just remind yourself that many media outlets are trying to get views and that means they need to create a dramatic effect. Unfortunately, human behaviour is that people react more to negative news than positive news. It is similar to having a bad experience at a restaurant. You are more likely to tell many more people about your bad experience compared to when you experience a good meal. Instead of falling into the trap of unreliable sources, do some research of your own using credible sources so you get a clear picture of what is truly happening.
Talk to Your Advisors
If you cannot shake the feeling of panic, do not hesitate to call your financial advisor. Ask them to take time and go over your investment strategy with you again relative to your risk tolerance and investment goals. The value of professional financial advice should not be underestimated as shown in research conducted by both Morningstar and Vanguard.
Market fluctuations are a totally normal and expected part of investing. The key is to stay calm and trust that you and your advisor have put together a plan that will thrive in the long term, regardless of any short-term losses.
Andrew Brydon, CPA, CA Wealth Counsellor