The 2022 stock market has been one of the most volatile on record, sparked by the global impact of the COVID-19 pandemic, high inflation, soaring interest rates, and fear over the dreaded “R” word (recession).
Market volatility can be uncomfortable: many investors feel they can't control it and want to avoid it. It's important to focus on things that can be controlled, like developing an investment plan that minimizes risks while helping you achieve your financial goals, rather than dwelling on market fluctuations.
Being uncomfortable can often cloud investment decisions with emotion. Fear and greed – not market movements – are usually the greatest risks to achieving long-term financial objectives. While you can't ignore your emotions, understanding the root of those emotions can help you channel them more productively in times of uncertainty.
Here are some tips to avoid making investment decisions that are driven by emotion.
Avoid “selling low, buying high” mentality
This behaviour is obviously counter-productive, but many investors do it unwittingly. As humans we are hard wired to avoid losses.
Loss aversion isn't always a negative. It may prevent investments that could be harmful to your financial health. However, often when markets decline, many investors feel the emotional need to sell their entire portfolio, hoping to avoid further losses. These same investors reason that they will buy back in when markets rebound.
Unfortunately, it's hard to predict when to get out and when to get back in — putting you at risk of missing the best trading days and not being able to achieve your financial goals.
Staying invested in a portfolio with proper asset allocation, not reacting to market timing, will help you to avoid selling low and buying high.
Don’t focus on the headlines
Media headlines are not indicators on which to base an investment strategy. The media wants you to consume the content, which often means framing stories in ways that generate interest. For example, you might be tempted to chase performance by buying the latest trending investment or selling your investments altogether because a news report exclaims the market is “crashing."
Rather than focusing on the daily headlines, keep your long-term investment goals in mind. Over the long term, we know markets will have more up days than down. We also know that they tend to fall harder than they gain, they just fall less frequently. Short-term market news can be a distraction that causes unnecessary emotional turmoil and could be detrimental to your long-term investment goals.
Keeping focused on your long-term investment goals can lead to an increased feeling of emotional security and ultimately allow you to make better investment decisions.
Diversify your investments
Having a portfolio with the appropriate mix of investments can protect it from risks specific to a particular company, industry, market, economy and / or country. Diversification is a key component of a portfolio designed to perform through the entire market cycle, not just over the short term.
Holding a diversified investment portfolio is the most sensible way to fund the investment goals that are important to you, but it may not provide the same emotional thrill or cocktail fodder as a concentrated portfolio of “hot" investments. Don't give in to this emotional trap.
Speak with your advisor
It can be stressful when you miss an investment opportunity or when the markets move negatively. An advisor can provide the experience, perspective and level-headedness to help filter out the daily noise and allow you to stay on track over the long term.
Additionally, they can help you construct your goals and investment strategy as needed, and ensure you are adequately diversified. A review with your advisor gives you the opportunity to revisit your plan, ask questions and reassure yourself that you're on the right path despite market fluctuations.
Set realistic expectations
After a prolonged period of market stability, we often have to remind ourselves that markets don't only move up, they move down as well — and that both are part of a normal, healthy market cycle. In times of financial stress it is easy to lose perspective on how markets work.
It's also easy to forget that a diversified portfolio designed to reduce risk while achieving the performance needed to meet your financial goals probably won't perform as well as the latest speculative investment story, or even as well as the general market during a full manic bull market. The flip side is that your diversified portfolio will likely protect you better on the downside.
Emotionally it may seem reasonable that your portfolio will capture all of the upside, while avoiding the entirety of any decline, but in practice, this is an unreasonable expectation that can lead to poor long-term decision making.
We are here to help
While we can't predict with 100% accuracy what will happen with the markets, we can take steps to prepare ourselves. Before you make an investment decision based on your emotions and the latest market noise, stay calm. Remember your long-term financial goals and take comfort in knowing your MD Advisor* is here to help if you need to talk about it or have any questions.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.