In mid-December 2018 I was exchanging messages with a friend who runs his own self-directed investment account through a discount brokerage. Over the course of several years, his investment performance was, on paper, “doing fine”, corresponding to the systematic rally in the stock markets since the Great Recession in 2008. In the last quarter of 2018, we saw both US and Canadian markets pull back and lose about 20% from an all-time high in September 2018. My friend sold everything in his TFSA and RRSP (remember, selling things at a loss in registered accounts is contribution room that you will NEVER get back). Since the start of the new year, the market has since regained about 13%. Talk about a rollercoaster ride. Put yourself in his shoes. What would you have done?
The moral of the story is this: by the time you factor in excessive trading costs, taxes, and the inability to sleep at night, you’ve given up your precious time and returns. In fact, anyone who invested $10,000 in the S&P500 at the bottom of the market would now have a healthy $38,000 sitting in their account if they left it well enough alone.
Let’s try to be rational here and why I think you should be staying the course towards your long term savings goals. There are really only three things that could happen in the markets for 2019:
- The market corrects again. A correction is typically defined as a drop of 10% from its high price level. If that happens, your returns on paper would look pretty dismal, but you would still be collecting income from dividends and bond interest. If you are able to stomach it, putting more money into the markets when everyone is running out will allow you to pick up your favourite companies on sale. Think of it this way, if you’ve been eying flight prices to your favourite vacation spot and the flight goes on sale by 20-30%, you wouldn’t hesitate to jump on it, right? Well, same thing goes with the stock market. A ticker symbol is more than just three to four letters on your TV screen — they represent true, tangible companies.
- The market stays flat. Your returns would be flat, but as above, your overall returns (what we call “Total Returns”) would likely be positive due to collecting dividends and bond interest.
- The market goes up. Wow…talk about FOMO (that’s Fear of Missing Out in Millennial-speak). By not being invested in the markets, you may have completely lost the opportunity to get in at a lower price (that we may never get back to again). In the subsequent rally in the S&P 500 since the 2008 recession, if you “waited to get back in” after panic selling everything, you would still be waiting and missing out on the last 10 years of stellar returns. In fact, the average return on the S&P 500 from 2008 to the end of 2018 was about 14% (in USD).
Given the three scenarios above, it’s easy to see that as an investor, you should be invested in the markets, but the hardest thing for investors to do is stay the course, especially if they run their own self-directed accounts or have 24/7 access to information through an online app with their robo-advisor. When the proverbial dung hits the fan, it’s too easy to hit the sell button, run to higher ground, and then fail to re-enter the market. Don’t be that person.
If times are tough and you’re having trouble sleeping at night due to the stock market volatility, pick up the phone, or send us a text. That’s what we’re here for. We’ll act as a sounding board for you to vent your fears, frustrations, or happiness, because after-all, we’re human too. Remember, investing isn’t rocket science, but battling your behavioural biases and emotions can sometimes feel like it.