Various socio-economic factors can cause stock markets to fluctuate. Are you concerned about that? That’s totally normal. The good news is we’re here to help! Read on for the 5 things to bear in mind to keep your emotions in check and stick to your financial goals.
1. Staying calm and positive is a wise investment strategy
As in all kinds of situations, avoid making impulsive decisions; otherwise you may end up on an emotional roller coaster! Here’s what could happen with your investments if you let your emotions run the show.
Let’s take a look at what emotionally fuelled decisions can look like and how they could affect your investments.
The curve below represents stock market fluctuations. We’ve summarized how most growth stock investors typically react at each stage.*
The visual shows that even though emotions are perfectly normal, they can spur you to make poor choices. When the stock market is on an upswing, optimism tends to soar. But then when share prices fall, worry sets in and investors may panic and rush to sell their holdings. This means they miss out on opportunities when the market picks up again.
By keeping a cool head and taking a rational approach, you’ll increase your chances of weathering the storm with less stress and coming out of it in a better financial position. In other words, staying calm and positive is a wise investment strategy—that’s why it’s important to never lose sight of your most valuable asset:your long-term vision.
2. Historically, the numbers go up
It’s impossible to know when the bear market will end and when the bull market will begin. This was true 100 years ago, 25 years ago and 2 months ago, and it’s still true today.
Shortly after a big stock market drop, there’s often an equally sharp rise before positive momentum picks up again. Although past performance doesn’t guarantee future results, we see this decade after decade.
Notes: The values shown are in Canadian dollars. The peak dates were determined based on the market index without currency conversion to reflect the actual movement of the selected market. The initial investment dates of each index are different, because each index peaked on separate dates: Canadian market (S&P/TSX) on June 18, 2008, US market (S&P 500) on October 9, 2007, and the international market (MSCI EAEO) on October 31, 2007. On each of these dates, a $10,000 investment was made. The market low date is the same for all 3 indices: March 9, 2009. The valuation date is 5 years after that: March 9, 2014. The data used for these calculations comes from the Morningstar Direct database and is based on total return indices, including dividend reinvestments.
3. What goes down usually comes back up
Believe it or not, markets often deliver the best returns right after huge drops (aka market corrections).
That’s why we advise investors with a long-term investment horizon to stay the course and hold onto their investments. That way they’ll still be present in the market when prices eventually recover.
4. Automatic investments keep your emotions in check
By automatically investing the same amount at regular intervals, you won’t be tempted to try to “beat the market.” You’ll avoid making hasty trades when panic sets in or waiting on the sidelines for too long when the market improves.
This is why we recommend keeping up with regular automated contributions.
5. A diversified portfolio is better for weathering the unexpected
If you have the money, keep making automated contributions. You’ll be in a better position to benefit from good market opportunities in the future.
Lastly, diversified portfolios are more resilient during volatile periods; a portion of your investments is protected against major fluctuations.
As a rule of thumb, you won’t be affected as much by shaky market periods, unlike more daring investors.
Whether you’re young or nearing retirement, the keys to achieving stability and long-term growth are the same: look at historical investment return data, manage your emotion, don’t touch your investments and automate your savings.
If you feel uncertain, take a deep breath and remember: Based on data from the last 100 years, changing your course during a storm usually isn’t the best strategy for your investment in the long term. You’re better off waiting for everything—including your finances—to stabilize.
If concerns about the current economic environment are keeping you up at night, don’t keep it to yourself. Contact your advisor for insights and reassurance. Our priority is to guide you through these tough times, and your Desjardins advisor can help ease your worries.