I don’t think it is an exaggeration to say that the markets have plunged over the last month. The COVID-19 crisis and the attempts to mitigate it and suppress it have been mainly responsible for the near 38% drop in the Canadian markets (TSX) from its high to its recent low. Having said this, it is neither the virus nor the market crash that is causing me to lose sleep.
This is my 25th year as a financial advisor, and I have seen many different market crashes and corrections. Yes, this one is unique, but so were all the others. The Asian currency crisis, the dot-com bubble, 9/11, the invasion of Iraq and the 2008 financial crisis were also all unique. After each one, the markets always came back. Since the vast majority of my clients have diversified portfolios and they are long-term investors (even the retired clients), I am not overly concerned that they will do well and continue to achieve their goals.
On the other hand, in the last few days I have sincerely lost sleep thinking about the handful of clients that decided to get out of the markets to “wait for things to look better”, or to “wait until things calm down”, etc. By the time they are comfortable getting back into the markets, it will almost surely be higher than the point at which they got out. I am worried about the measurable harm they are likely to do to their long-term returns and goals. It is possible that the markets will go down further and they will get back in, but my experience tells me that they will be even more nervous about investing at that point.
"You make most of your money in a bear market; you just don't realize it at the time" - Shelby Davis
A bull market in less than three days
It may already be too late. The market is very unpredictable in the short-term, but as I write this, the market is already in bull market territory. It doesn’t feel like a bull market? Maybe so, but the most common definition of a bull market is an increase of over 20%. We have experienced this in the last 2.5 days. If you were unlucky enough to get out of the market on Monday, March 23rd, you missed the extreme rebound on Tuesday, Wednesday and Thursday. You have missed an entire bull market in what feels like a blink of an eye. The market could very well go back down and you may get another shot at getting back in at those prices. However, every day the markets go up, I am losing sleep worrying about the clients who are sitting on the sidelines. As I often say to clients, “It is sometimes safer to be in the markets than out of them.”
The hardest thing to do is nothing
For a short period of time, I used to teach a course on behavioural finance. This is partly the study of the psychology around money and some of the mistakes we make in investing simply because we are human. For instance, if there is a problem in life, we usually need to do something about it otherwise it will continue, or get worse. In investing, however, this is usually the wrong instinct. Quite often the best thing to do is nothing. It feels neglectful, but the markets and balanced portfolios will go up in the long-term. When they temporarily go down, we see this as a problem, and we want to stop the losses. This is usually a mistake.
In most cases, we should do nothing, or perhaps see this as a pleasant opportunity to buy more at lower prices. For those who are retired, this may be an opportunity to rebalance the portfolio. We have to be almost robotic about investing. We often must ignore our emotions or even go counter to our emotions to have long-term success. Having an investing discipline and sticking to it is key.
Although the market is very unpredictable in the short-term, it is actually quite predictable over time. For instance, I don’t really know where the market might be two weeks or two months from now. However, I feel pretty good about the idea that the markets will be higher in two years than they are today. If your goals are long-term, then what happens in the short-term should not be very relevant. For instance, if you are 70 years old and living off the income from a balanced portfolio, then your focus should not be on what is happening in the next few weeks or months. Your focus should likely be on maintaining your income and growth over the length of your retirement.
The Tightrope Analogy
When we experience a crash or correction in the markets, I sometimes use a silly analogy of a tightrope walker. Although I have never been given lessons on tightrope walking, I’m sure the advice is to maintain your balance and look to the horizon. Whatever you do, don’t look down and don’t look back. Keep your eyes on the goal, stay calm and don’t make any sudden movements.
Hopefully you get the analogy. Focus on your investment horizon. Don’t focus on short-term movements. Stay calm and balanced. The short-term returns (or losses) don’t matter as much as your long-term return. There will be good years in the market and bad years. The point is to take advantage of the fact that there are more good years than bad years. If you simply stay the course and focus on that long-term average, you will reach your goal.