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Scotia Wealth Management

Stay – Don’t Stray – the Course

THE TEMPTATION TO OVERACT IN TURBULENT MARKET TIMES IS A STRONG ONE. CAN YOU RESIST IT? SHOULD YOU?

June 3, 2022

Global circumstances have created an unusually bearish market. But that doesn’t mean these are desperate times that call for desperate measures.

Global circumstances have created an unusually bearish market. But that doesn’t mean these are desperate times that call for desperate measures.

Want to hear a financial advisor joke? Of course, you do. Who doesn’t?

Two investors walk into a bar. The first one is visibly agitated. The other, calm.

Investor A: “The U.S. stock market is a bear market right now! Canadian and U.S. bonds are down, inflation is up like we haven’t seen in decades, and interest rates are rising… with the Bank of Canada predicting even higher rates! There’s a war in Ukraine, COVID just won’t go away here and especially in China, consumer confidence is dropping, a recession seems imminent, there’s so much uncertainty… What should I do with my money?”

Investor B: “Stay the course. Things will improve, they always have.”

Investor A: “Are you kidding? The world is ending. I want out!”

Okay, it’s not much of a joke, is it? In fact, it’s a pretty typical conversation in these turbulent times, when it seems everything’s unknowable. Not just the market… everything. (Btw, this story had a happy ending: After Investor A stormed out of the bar, he turned to his Wealth advisor for help.)

SHOULD I STAY OR SHOULD I GO?

My cautious investor side and 30 years of professional experience put me in the “stay” category. But why does human nature fight so hard against that? I believe that in times of uncertainty, people are in need of a “fast fix”… the feeling that they’re doing something that will soothe their nerves and make the world all right (“Retail Therapy” exists for a reason).

Here’s why I think it’s so hard for us to “stay the course”:

1) Investors like chasing shiny objects

Humans love novelty. We like to try new food, go to new places, meet new people, buy new cars. We also love to hear – and speculate – about “new” ideas. Here’s the perfect example: Not long ago, cannabis was the new big thing. This shiny new object saw investors falling all over themselves to invest in cannabis stock; clients were calling and asking to sell off solid, dividend-paying stocks to reinvest those proceeds into cannabis stocks such as Canopy Growth Stock.

Canopy turned out to be one wild ride. It went public at around $7, skyrocketed to about $60, and now trades right back where I started at approximately $7. Based on what I saw, many investors bought high and sold very, very low… and lost a lot of money.

Cryptocurrency might be considered another shiny object. Bitcoin hit a high of $70.000 U.S. and now trades at approximately $30,000 U.S. Again, many investors bought at that $80K high (or not far from it) only to see the value plummet.

Those “shiny new objects” can be a lot like a dog seeing a squirrel, and being so distracted and focused that they chase it into oncoming traffic. Investors, too often, do the same… losing their common sense and chasing new and speculative ideas straight into financial losses.

2) Fear of Missing Out (FOMO)

Imagine your friend has a pool party. All your favourite people are invited… except you. All that fun that all the cool people are privy to, and you’re not part of it.

Who wouldn’t hate that? I would!

That scenario happens with stocks all of the time. For example, if your cycling buddies bragged about how much they’re making on an investment, wouldn’t’ you want to go for that ride? To the point that you might forget your investment discipline and jump in without appropriate due diligence?

But investing isn’t a pool party. And like party small talk, some people might boast about their “wins” or toy with the truth somewhat when talking about their investments. Do your research before taking that dive.

3) The patience of Job

Here’s a parable that I often apply to investing: The Book of Job.

In this tale, Satan curses Job with unimaginable hardships: the loss of his possessions, his children and, ultimately, his own health.

Satan does all he can to get Job to renounce his God. Yet, through everything, Job remains steadfast in his faith and his patience in God.

When I invest, I often think about the “Market Satan” throwing everything she or he can muster at investors (including, but not restricted to, shiny objects and FOMO) in the hope of throwing us off our investment plan.

“Market Satan”, get thee behind me. Investing can be very simple, but it can also take the strength of, yes, Jobe to summon up the patience to stay the course when the market runs hot and cold. Resist that easy temptation to bounce around from one investment to the next. Keep faith in your plan.

A FIVE POINT PLAN FOR BUILDING AN INVESTMENT PLAN

We’ve established that investors like to chase shiny new objects, follow the crowd, and grow impatient with underperforming investments. So, what’s an investor to do… especially in these bear market days? (Or, to be honest, at any time?)

I suggest building an investment plan before any money is invested. Here’s how to approach it:

  1. Ensure your plan has a strategy to handle a bear market (i.e.: increasing cash positions)
  2. Select an investment strategy that fits your risk attitude
  3. Create an asset allocation that balances your willingness, need and ability to take risks
  4. Avoid timing the market
  5. Follow your plan come hell or high water.

My previous blog, The Why, What and How of Creating Your Investment Policy Statement shares more info on approaching a plan.

ONE FINAL WORD OF CAUTION

I generally advise clients to hold their investments during market declines because we’ve built investment plans that allow for these inevitabilities by populating them with large and stable Canadian and U.S. companies. Hence, no changes are needed.

However, I often meet new clients that don’t have an investment plan; who’ve invested in speculative stocks and brought far too high a risk level to their portfolio. In these cases, I recommend changing their portfolio ASAP, despite the market conditions.

If you’re unsure whether your investment plan is appropriate for your investor profile, please call me and I will personally review your portfolio and you decide if you should stay or go.

“Stay the course” may not be a great punchline to a joke. But it is serious, solid financial advice in a turbulent market like the one we’re seeing today.

The process of finding a financial advisor can be overwhelming. It is our job to make that process simpler and easier.

Dri Financial Group’s proprietary Wealth Navigator Process is designed with you in mind.

Its structured framework helps you make an informed decision and feel confident in our team and management practices before we get started.

We offer you a range of services from creating bespoke financial plans and providing investment advice to helping you take advantage of our investment models. If you would like more information on the Wealth Navigator Process or our team, call me any time at 416.355.6370 or email me at richard.dri@scotiawealth.com.
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This publication has been prepared by Scotia Capital Inc. and is intended as a general source of information only and should not be considered as personal and/or specific financial, tax, pension, legal or investment advice. We are not tax or legal advisors and we recommend that individuals consult with their qualified advisors before taking any action based upon the information contained in this publication. Opinions and projections contained in this publication are our own as of the date hereof and are subject to change without notice. While care and attention has been taken to ensure the accuracy and reliability of the material in this publication, neither Scotia Capital Inc. nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of such material and disclaim any liability resulting from any direct or consequential loss arising from any use of this publication or the information contained herein. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of Scotia Capital Inc.