Market Correction? What to do.
We’re in the middle of the largest market correction since March of 2020, the COVID recession. And even though that one was larger in scale, it didn’t seem to hurt as bad, likely because it all happened so quickly.
Fast forward to 2022 and year to date, the US market is down almost 13%, the TSX is down 1.5%, Europe is down 8.5% and even the Canadian bond universe, the supposed safe investments, are down 10.5%. Inflation is high. Interest rates are rising. There is war in Europe. And supply chains have been interrupted countless times due to COVID lockdowns.
In a market environment like this, which comes along every so often, there really isn’t anywhere to hide. But that doesn’t mean that there isn’t anything you can do to get through this a little better than most. Here are a couple of simple tips to help you weather the storm.
1. Tune out the noise
All throughout history we’ve had world events that unsettle even the most rock steady among us. As we work through them, fear takes hold and brings us to a dark place, where we often can’t see any positive outcomes anymore. And yet the market has carried on, even through the worst of times.
Source: Morningstar Direct - S&P 500 index, St. Louis Federal Reserve
Looking back, it’s amazing to recall what sentiment was like in the middle of those events (and there are many more that come to mind that aren’t listed). And yet in hindsight, they don’t seem nearly as dreadful as we once thought they were.
Humans are resilient, and that means that markets are too. So try to shut out the headlines and prevent some of that fear from creeping up in the first place.
2. Ignore your statements
Studies have been done over the years to compare the annualized returns of various asset classes. Stocks, bonds, real estate, etc. all in one spot with nowhere to hide. Added to that list, is the average investor return over the same period.
Source: Barclays, Bloomberg. Factset, Standard & Poor's, J.P. Morgan Asset Management.
This same study over various periods of time consistently shows that the average investor as one of the worst performers. But how can that be?
We let our emotions get in the way. A 2019 article from Kiplinger talks about how investors face two different types of emotional reactions that cause their returns to suffer. The first is commonly known as FOMO (or fear of missing out) which causes investors to chase returns when markets are doing well, even when it doesn’t make sense with their underlying investment strategy anymore. The second is FOLE (or fear of losing everything) which causes investors to sell off at the wrong times because they assume the losing will continue until they have nothing left.
Now what does this have to do with your statements? Well think about the last time you opened your statement and saw a big gain or loss. How were your emotions?
If you have a good investment strategy, have some faith in it and avoid the things that will cause you to make emotional decisions.
3. Start making contributions
One of the greatest investors of our time, Warren Buffett, is famous for saying “be greedy when others are fearful and fearful when others are greedy”. What he means by this is that when everyone else is selling because they are afraid, you should be buying. Especially if nothing has changed with the long-term view of your investment strategy.
Take the company Microsoft as an example. Microsoft is a large company that has a very strong track record of performing well. Recently it has been sold off and is down over 15% year to date. Yet nothing has changed with the company. In fact for the last two quarters they have posted better than expected earnings. So if you like the company and view it as a long-term holding, wouldn’t you like it even more if you could get it 15% off?
Source: Missniao.wordpress.com DCA vs. lump sum investment plan over the span of 8 months.
The best way to do this is to make regular contributions into your portfolio and allocate that money according to your asset allocation. It’s called dollar cost averaging, and over time it works great.
It’s been a difficult year for investments, but hang in there. These three simple tips are things that are directly in your control, unlike the markets, that will help you to get through this period better than the average investor.