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Financial Friday #85: How to Deal with a Market Meltdown
Markets Hit New Highs – Time to Pull the Plug?
"What goes up must come down?" If you believe that old adage applies to the markets, stock prices might be heading south sometime soon.
Markets have been on fire in 2021 and the TSX has just soared past the 21,000 level, a 21% increase since the beginning of the year. Regardless of the economic factors underlying the rise and whether it is merited or not, the fact is that stocks can suddenly drop with little warning.
Predicting the timing, extent, and duration of a fall in the market is something the experts seldom get right and can never do on a consistent basis – so what’s an investor to do when left holding the bag as stocks 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 created a portfolio to match that risk. For example, you may have passed on a fund that specializes in small, hi-growth tech firms in favour of a lower risk index fund which moves in sync with an entire market. Regardless of the outcome of that choice, you have to live with it and beating yourself up about it won't help.
Ideally, you have already prepared for market volatility by mixing up what’s known as your asset allocation. Some stock downturns are regional or country-specific in scope and spreading you investments across several international markets can reduce the impact of a dip in any given market. You can also add bonds to the mix (they often move contrary to stocks) or other types of securities to further spread out your risk.
Don't forget to adjust your asset allocation to reflect changes in your financial situation and life stage; it's not a one-time task.
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, markets have always recovered. 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. In other words, stay the course! The TSX is 79% higher today than it was in March of 2020 when the pandemic hit, and almost 20% higher than it was just prior to the pandemic.
Exiting the market at a peak is more often the result of 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.
If you are thinking about entering the markets and want to learn more about how to minimize your risk, make sure to join our webinar next week. We will be expanding on a few of the points above and giving you the facts you need to make your own informed decision.
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