Financial Friday #121: Timing Isn't Everything When it Comes to the Markets!
Investing in the markets: Timing isn't everything!
The TSX and many other stock market indexes have been on a roller coaster for much of 2022 after posting double-digit gains in 2021. As stock indexes fluctuate (the TSX is currently down 7% for 2022) and interest rates rise on more secure investments (some GICs now top 4%), some market investors are looking for alternatives as volatility triggers their anxiety.
Ideally, you have already prepared for market volatility by mixing up what’s known as your asset allocation. Stock downturns are inevitable and although they may be global in scope, the degree to which they affect a particular region or country can vary. Downturns also affect some industries a lot more than others. For example, a recession may crimp profits for travel related companies while producers of basic food items or household necessities may see their profits (and stock price) remain relatively stable.
Spreading your investments across various industry sectors and/or geographic regions can help reduce the impact of a dip in any given market. You can also add bonds to the mix in your portfolio (they often move contrary to stocks) or other types of more secure holdings (even some cash!) to further dissipate your overall risk.
There are also mutual funds and exchange-traded funds (ETFs) which are professionally managed and take care of the asset allocation and diversification for you. In the past few years, all-in-one ETFs have made it very easy for DIY investors to purchase a basket of funds that is continuously rebalanced to manage the the risk level. Always keep in mind that you need to monitor and adjust your risk to reflect changes in your financial situation and life?stage;?it's not a one-time task!
Even with a diversified portfolio and all the market experience and knowhow you can muster, predicting the timing, extent, and duration of a fall in the markets is something even the experts seldom get right — and can never do on a consistent basis. So, what’s your average investor to do when left holding the bag as their market investments go for a tumble?
If stocks do slide, you should not be overly surprised nor emotionally broken; try to keep the situation in context. You entered the markets for higher returns and made a conscious decision to accept some level of risk, and then you invested in a portfolio to match that risk. Regardless of the outcome of that choice, you have to live with it and beating yourself up about it won't help.
While we highly recommend studying all you can to improve your financial literacy, overloading on the analysis and hype that goes with any market downturn can lead to spur-of-the-moment decisions you may regret.
Historically, the markets have always recovered, although the speed of the recovery varies greatly. For example, if you had invested just before the global financial crisis hit in 2008 when the TSX index was around 15,000, you wouldn't have seen the index reach that level again for almost 6 years! The recovery from the global pandemic in 2020 was much faster, with stocks recapturing all of a very sudden 33% plunge in March by the end of the year, and then tacking on a 20% gain by the end of 2021!
If you believe in the strength of the markets, the companies you invested in, and their ability to be successful over the long term, you are best to ignore the short-term chatter. Timing an exit from the market to cash-in on a peak or dodge a downturn often has more to do with luck than any sort of purposeful investing strategy. If you guess wrong, you will be stuck on the sidelines until the downturn eventually comes, or be forced to buy in again at higher prices. Riding out the dips with a long-term horizon and proper diversification/allocation is a much more realistic, and still very effective strategy.
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