Financial Friday #57

FEAR is a 4-Letter Word

A little over a year ago the TSX plummeted to around 11,200 and more than a few people thought their retirement dreams were over. At the time, it appeared that anyone following a risk-free strategy of market aversion and a pile of cash earning 1% just had the last laugh.

There is no doubt that stocks go down, sometimes dramatically, and that can be a deal breaker for potential investors. Watching your hard-earned cash being eroded by a fickle, sometimes irrational stock market is not a very appealing option and it may be keeping you on the sidelines.

Overcoming this fear of loss is a big hump to get over, especially for stock market newbies. You will have to justify the risk of getting into the market in your own mind, but here is some food for thought to help you with that decision.

  • It’s not a one-horse race
Anyone who has been to the track knows that $50 on-the-nose of a supposed "sure thing" usually leads to the demise of your fifty bucks. Stocks are no different and putting all your funds towards one, or only a few stocks is a risky strategy. Fortunately, these days one can easily purchase a basket of many stocks all wrapped up in an easy-to-buy bundle known as an index fund. These funds rise and fall in value based on the value of an entire stock market index (like the Dow Jones for example) and eliminate the risk (and hassle) of selecting individual stocks.
  • It’s not a sprint
While we do recommend regularly reviewing your portfolio, we also recommend taking a longer-term view and leaving active management (lots of buying and selling in layman’s terms) to those with the knowledge and inclination to do so. For most of us, a more hands-off approach using regular purchases of index funds is easier and still yields solid returns with minimal risk.
  • It’s not that hard
If you can figure out how to order a toaster from Amazon, you likely already have the computer skills to set up an online brokerage account and purchase an index fund. There is no sales pressure either – today’s DIY brokerage accounts leave the decisions on when to buy, what to buy and how much to buy entirely up to you.
  • It’s not Netflix
Binge watching your favourite TV series is an enjoyable pastime and a great way to relieve stress. Binge watching the minute-by-minute fluctuations in the value of your stock portfolio is a waste of time and will likely leave you a nervous wreck. We strongly recommend evaluating your fund performance at regular intervals (every six months) and make tweaks as required, but don’t sweat the daily ups and downs. Over time you will likely find yourself becoming more and more at peace with the amount of risk you have taken on and those initial jitters should fade away.

If you are stuck on eliminating investment risk you really need to get past that block. Stocks go down and stocks go up, but over time the trend is overwhelmingly positive. Case in point, the TSX is now over 19,000, up over 40% from a year ago and well above pre-COVID levels. Learning about a solid investing strategy will get you through the ups and downs, keep you within your risk tolerance, and most importantly, build wealth.

📚 Resources

1. When fear and greed take over
Anyone who remembers Gordon Gekko knows that fear and greed are staples of Wall Street movies, but it isn’t all fiction when it comes to these factors. They are real pitfalls that market investors need to understand.

2. Market volatility and investor behaviour
That "gut feeling" may be moving markets a lot more thank you think. The Ontario Securities Commission says investors need to look beyond traditional economics to figure out the market, especially during a pandemic.

3. Best ETFs in Canada for 2021
ETFs (Exchange Traded Funds) are a great choice for any portfolio due to their combination of low-maintenance, low-cost and relatively low-risk. Great overview of the advantages of ETFs in a volatile market along with over 50 fund recommendations from a panel of MoneySense contributors.

4. Lack of financial literacy is a lifetime sentence
Don’t just take our word for it, straight talk and open discussion about money matters from an early age will be one of the best things you ever teach your kids.