The past couple of years have been a reality check for many who invest in equities (stocks or stock-based mutual funds). Some sold off at, or near the bottom, and will forever look back on the stellar returns that the equity market delivered after March 2009. Others have left more recently after recouping some of their “losses.” There are still others who are seeking a direction. They need a reason to stay in or leave and join the masses that have flocked into historically low interest deposit accounts. They state that they do not ever again want to experience the volatility that we saw in 2008-2009.
Let’s first clarify the volatility issue about investing in equities. You must expect that your equity investments will go through a significant decline in one year out of every four or five years. This is not a promise but it is what history tells us. Anyone who says that you can solve all your volatility worries and still be invested in equities is not being honest with either you or themselves.
By investing in equities you will experience volatility, ups and downs of the market. The truth is that equity markets suffer a severe decline about once every four or five years. The average decline, historically speaking, is about a 30%. Sometimes the decline has been less severe, and other times, harsher. We saw some global market declines approaching the 50% range during 2008-2009.
It is these periods of decline that test the nerves and emotions of investors. Those who panic and flee the market will only set themselves up for disappointment and missed opportunity. The cycle of selling at the bottom because of fear and panic and then buying back in at, or near the top because everybody else is “making a killing in the market” is a sure recipe for financial frustration.
The real question is, “Why are you investing in equities?” Ultimately the answer is growth and a higher return than offered through guaranteed investments. But the real answer must be, and can only be, to achieve a better lifestyle in the future. If your future depends on achieving a certain return that cannot be achieved using guaranteed investments, then you must seriously consider equity investing. But if guaranteed investments can provide you with the lifestyle you desire, then you should avoid equity investing altogether.
By being an equity investor you must somehow overcome the urge to panic during market lows. Understand how equity markets behave, learn to embrace volatility, and above all, relax. Good quality businesses that are well managed, have expanding markets, pay dividends, and have a history of rising share prices, have historically rewarded investors many times more that guaranteed investments.
So the next time the equity market goes into decline, remember that it should be no surprise to you. In fact, you were expecting it. You are emotionally prepared for it and you may even want to take advantage of the weakness and buy low instead of selling. This is the only truth about investing in equities.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.