For long-term investors, investing in the stock market provides a rollercoaster of emotions in which the ride is not always smooth. Market corrections are a normal occurrence but are not easy to predict. The important thing is to recognize when it occurs and to try not to let it dictate how you respond.
As mentioned in my last blog, having a trusted advisor helps investors through these times and will keep you focused on the long-term growth potential of the investment not the short-term fluctuations. Investors that don’t have guidance allow emotions to dictate how they invest. When markets are strong and portfolio returns are high, it’s easy to jump in and sometimes take on more risk than you really should. When markets are correcting, the fear kicks in sometimes resulting in decisions to sell these investments at a loss. So, the end result in this instance is buying high and selling low which is opposite to the optimal scenario which is to buy low and sell high.
Watching markets go up and down can be trying at the best of times… However if you stay focused on the long term, you will be rewarded, for example a $10,000 investment at the end of October 1998 would translate into $41,483, or an annualized return of 7.7% at the end of December 2017.*
* Annualized return for S&P/TSX Composite Total Return Index. Source: Morningstar Direct. Data to December 31, 2017. This information is for illustrative purposes only. Past returns are not indicative of future results.
I’ve included a diagram below which shows the length of bull vs bear markets. For the novice investor; according to Investopedia, the use of "bull" and "bear" to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air, while a bear swipes its paws downward. These actions are metaphors for the movement of a market. If the trend is up, it's a bull market, while downward trends indicate a “bear market”. If you notice in this diagram, the bull markets are much longer and stronger then bear markets.
When markets are turbulent, temptation to move to cash is on the back of some investor’s minds. However, perfect timing is pretty much impossible to pinpoint; when to go to cash, and most importantly when to get back in. Generally, when the markets have had a correction the rebound thereafter can be significant. So, if you’ve made the decision to come out of the market, it will be likely that you would miss out on the best weeks. Below you will see the cost of missing out on just a few of the best weeks in the market, vs staying invested.
Keep this in mind as this volatility continues (or not), stay calm and ride the Bear. The Bull will also be down the road, and you don’t want to miss out on that! Remember investing is a marathon not a sprint.
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Gilda Saunders is a Certified Financial Planner with Credential Financial Strategies Inc. She can be located at:
2 Herald Ave. Millbrook Mall
Corner Brook, NL A2H 4B5
Credential Financial Strategies Inc. offers financial planning, life insurance and investments to members of credit unions and their communities. Mutual funds are offered through Credential Asset Management Inc. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This report is provided as a general source of information and should not be considered personal advice or a solicitation to buy or sell any mutual funds. Please speak to your Credential Financial Strategies Representative or personal financial representative before making any financial planning decision or implementing any strategy.