Staying Invested

When stock market volatility picks up, the patience and resolve of investors wears continuously thinner. It’s the tough times like these that provide those willing to “stay invested” the largest rewards.

The fourth quarter of 2018 brought in a steady three months of heightened volatility after several years of relative calm. The US markets (using the Dow Jones index as an example) reached a peak of almost 27,000 at the end of Q3, a record high, before ending the year at 23,300. This represents a drop of -14 per cent from it’s peak.

It’s important to remember that a new record high of a market index is and always will be a regular thing. The Dow Jones Industrial Index (DJIA) was as low as 97 points in 1935 and sat at only 15,000 five years ago, a value many felt could not be topped. The years between 1935 (and even 2013) and today have seen countless new “all time record highs”.

$1,000 invested in US stocks in 1935 would be worth approximately $3.9 million today! How could anyone have lost money while investing over some or all of this period of time? Unfortunately, many have done just that as they, to quote Warren Buffett, “danced in and out of the market”.

The stock market is unpredictable and attempting to time the market can be disastrous to most investment portfolios. One thing for sure is that the vast majority of “market timers” would be far better off if they simply left their accounts alone.

The US has done well but what about the rest of the world?

Canadian stocks will always be an outlier since we have such an un-diversified market and “staying invested” if your portfolio holds mostly or entirely Canadian content may carry more risk.

But globally, long term returns have been similar to the US’s and the idea of staying invested rings true. This again goes to illustrate the importance of having your portfolio properly diversified, in both geographic and sector terms.

The dangers of attempting to time the market are many. Those who have attempted to take their money out when they felt that the market was going to drop and re-buy at a lower price have often missed the best of these years. My recent market volatility column showed that missing out on only the five best trading days of the last 40 years would result in missing out in almost 50 per cent of all the returns.

Without a crystal ball, there is no way that anyone can truly predict where the market will head in the short term. In 1973, Alan Greenspan himself was quoted saying that he was “unqualifiedly bullish” just before a massive market crash. In 1979, Business Week’s “Death of Equities” issue came out right before the market’s largest bull run ever.

This simply shows that even the brightest investment minds in the world can’t predict what will come next. But the best thing you can do is to stay invested in your plan and avoid making emotional or “knee jerk” reactions.

Now to be fair, investing in the stock market is not for everyone. Those that are simply uncomfortable with seeing any drop in their current market value should look to other options. The markets do experience significant volatility and it may not be appropriate to invest in the stock market with money that is needed in the short term.

As always, each investor’s situation is unique and investment choices should be carefully considered with a qualified investment advisor before making any decisions.

If you do decide to take part as an investor and put some of your nest-egg into the markets, then the best investment choice you can make is to stay invested and not let the market psychology get the best of you and your potential returns.