Worried about recent stock market volatility? Some investors might feel unsettled by media headlines screaming that the sky is falling. But it’s important to remember that volatility is an inevitable part of participating in the financial markets.
Our MD portfolios are built to withstand market ups and downs. During difficult times, the key is to think long-term and stay invested.
What Has Caused Recent Market Volatility?
Recently, we saw a correction in equity markets—from peak levels in mid-July to lows at the end of August, as the TSX fell 11.4 per cent and the S&P 500 lost 12.2 per cent. This correction was triggered in part by China’s decision to devalue its currency, which led to speculation about the state of China’s economy in general.
Further adding to the uncertainty was a slump in commodity prices – led by oil—which contributed to price swings in developing-nation stocks. European and Japanese stocks soon trended downward, and North American stocks followed suit.
‘Market Correction’ Versus a ‘Down Market’
A market correction is a decline that happens for a very brief period of time, often just a few days; some of the losses are quickly recovered in subsequent days. These market corrections—and market volatility in general—are unpredictable and usually based on human behaviour, not on fundamental reasons.
A market correction should not be confused with a down market, more commonly called a “bear market.” This is a longer-term phenomenon, based on an economic recession and low economic growth expectations.
Our Approach During Periods of Volatility
At MD, we manage funds and portfolios to withstand market volatility on several levels.
- Client Level
Your MD Advisor will help you build the right portfolio for your needs—and help you stay on track. While it’s tempting to be swayed from your strategy by market fluctuations, staying the course, as your Advisor will tell you, is key to long-term success. Our advisors have the experience and expertise to guide you through times of market volatility—and they can ensure you stay positioned to benefit from the inevitable market recovery.
- Portfolio Level
Our first step is to recognize that market volatility exists and to construct our portfolios to deliver the ups and withstand the downs. MD’s Global Portfolio Strategy process helps you identify your investing needs, wants and wishes, and it incorporates the time horizon needed to meet these goals. Our portfolios are built with time horizons that will help you stay the course when volatility occurs. We also look ahead six to 24 months and make adjustments to portfolios to take advantage of market volatility.
- Fund Level
MD has a solid track record of helping to protect client capital in market downturns. From our roots in fundamental bottom-up value investing, we look for defensive characteristics in many of the strategies we employ. We manage each fund with specific expectations of performance in a variety of market conditions, and we favour strategies that protect your capital in market downturns or during periods of extreme volatility.
Preparation Is Your Best Defence
A market correction doesn’t mean that you should change your investment plan. Instead, it’s a reminder to make sure your portfolio is well structured and your investments properly diversified. Above all, don’t panic. That’s when mistakes happen. Remember, any changes to your strategic asset allocation should be driven by life events—not by market events beyond your control.
For more information about market volatility, contact an MD Advisor. Call 1 800 267-2332 or visit www.mdm.ca. MD provides objective advice at every stage of your career—from medical school through retirement.
Other Examples of Market Corrections
Market corrections are fairly common, and sometimes necessary to cool off an overheated market.
This chart shows the August 2015 correction in the S&P 500, and some of the subsequent recovery.
Compare that recent correction to the market correction in 1987, after which markets took almost two years to recover. Several factors increased the severity of 1987’s market correction. The first factor was the impact of margin calls on market liquidity and operation. Today’s financial institutions are more structured, with stricter regulations regarding margins. The second issue in the 1987 correction was program trading strategies. Strategies are more sophisticated today, but stock market exchanges have also implemented circuit breakers to prevent this kind of event from happening in the future. Third, it was difficult to obtain reliable information. In 1987, transactions were largely entered manually, while today’s transactions are electronic and accounted for in real time.