MBA, CIMTM, Fin. Pl.
Investment Specialist, Products Knowledge
Here we are: gradual deconfinement has begun in Québec, as in many regions of the world. The first data from countries that have already started the process are encouraging and seem to indicate that the spread of the virus remains under control, as long as people comply with health measures.
Stock market rebound
In terms of investments, the various North American stock market indices have rebounded substantially since March 23, 2020. As of May 22, 2020:
- The S&P/TSX was up 33.7%.
- The S&P 500 has continued its uptrend with an increase of 27.9% (in Canadian dollars).
- On average, Canadian bonds have gained 4.1% since the March 23 bottom.
With this rebound, the markets have regained much of the decline caused by the pandemic, but we have still not returned to the levels of early 2020. A number of factors remain unknown as to the future trajectory of the markets.
The question of the day
In the past few weeks, we’ve discussed the behaviours that investors should adopt in times of declining markets, especially avoiding panic. Today, we will examine the question raised by the current gradual deconfinement: should we change our investor behaviour during this period?
Above all, the key is to identify your objective. Investing and return are not ends in themselves: generally, we save and invest in order to achieve a specific goal.
Very often, we save to have enough for a comfortable retirement, or for a major purchase at some point in the future. Your children’s education or special needs, or a career or personal project could be other reasons for saving. Your investment portfolio becomes a tool to achieve your goal.
A matter of time
With this in mind and taking into account the current economic situation, should you start your savings now, or wait until later? Know that in investment, time is your best ally. The earlier you start saving, the more you’ll accumulate. The most important factor is not so much when you decide to invest, as how long you will stay invested.
A study by Brinson, Singer and Beebower, published in 1991 in the Financial Analysts’ Journal, shows that market timing accounts for only 1.8% of the long-term return of a portfolio, while portfolio diversification accounts for more than 91% of the return.
In the same vein, if you already have a large portfolio, you’re better off measuring how far along you are to achieving your objective rather than just the return, in order to stay focused on your goal.
What does the IQPF tell us?
As of May 22, 2020, our FDP Balanced Portfolio has returned -2.30% year to date. If we take a step back and examine the result since January 1, 2019, i.e. over a period of 17 months, we see that this fund produced an annualized return of 8.39% for this period.
However, according to the IQPF’s projection assumption guidelines for 2020, the rates of return to use for a retirement projection for a person with a balanced portfolio (60% equities and 40% fixed income) are 3.90%. If you hold our fund in your portfolio, then you are probably still on track, and even slightly ahead, to achieve your retirement goal.
Putting things in perspective gives you a more comprehensive view of your situation and enables you to better assess your progress.
Two sides of the coin
Periods of stock market fluctuation like those we’ve experienced since the start of the health crisis are still very difficult for investors. There’s a strong temptation to exit the markets to avoid bigger losses during a downturn or to try to make quick gains during a rebound. At these times, you could easily lose sight of your investment policy, which was carefully crafted with your advisor to reflect your investment horizon and the acceptable level of risk to achieve your objectives.
Leaning towards or taking one of these extreme actions reflects the power of the emotions that can be triggered by periods of great instability. If you exit the markets, you lose the opportunity to recover your losses and to benefit from a rapid reversal of the trend; if you seek gains at any cost, you may take excessive risks and jeopardize your financial security. In either case, you’re stepping out of your comfort zone. Deviating from your risk profile greatly increases the likelihood that you will not achieve your goal, whatever it is.
Stay focused on your objective, not on market events. Always ask yourself: will my portfolio enable me to achieve my goal, with a level of volatility that is acceptable for the type of investor that I am?
Solutions for living with the crisis
Whether it’s to re-enter the markets or to try to achieve quick returns in the short term, keep in mind that the current situation is exceptional (in every sense of the word) and that the markets will likely see more turbulence. Future economic data and companies’ financial situation may not be so rosy. And, let’s be realistic, it’s almost impossible to find the perfect day to invest or to re-enter the markets. Under these circumstances, gradual investment becomes a very attractive alternative.
Gradually is better
Rather than waiting for absolute certainty that the markets will rise for an extended period, why not divide the amount you want to invest annually into equal periodic investments, say monthly or bi-monthly? This way, you’ll participate in upswings and benefit from market momentum. In the event of a sudden decline, your subsequent planned investments will be made at a lower share price, which will enable you to buy more shares. Either way, you win.
Protect your future
At the Financial, we know that your savings are not just numbers. They represent a vision of your future that you build every day and that you want to protect.
During this difficult period, all our teams are there for you and ready to support you. We remain vigilant and on the lookout for market opportunities.
If you have any questions regarding your portfolio, feel free to contact your advisor. He remains your best resource for achieving your life plan and is easily accessible.
Stéphane Girard, MBA, CIMTM, Fin.Pl.
Product Manager, Professional Practice
The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. For any questions, don’t hesitate to contact your wealth management advisor or your tax specialist, accountant or legal advisor.