Coping with investor anxiety syndrome
Panic selling is a major mistake
After a decade with record low volatility and world stock markets enjoying a Bull market with few big blips downward, we are now in the midst of a nasty and likely prolonged correction. The important thing here is to keep your head and not sell out of panic, because the people that do that will be the biggest losers in this hysteria.
Backdrop to COVID-19
It is important to remember that if you have been invested for most of the last decade, you have done very well. If you are retired, you have been selling high every month while living off the income from redemptions, which has worked out very well for you.
Many of my clients who moved their RRSP to a RRIF a decade ago actually have more money in their RRIF today (well not “today,” but two weeks ago) than they did when it was converted from an RRSP. Reflect on that while you think that you are now selling low. It is true that redemptions now (monthly or lump sums) will be sold at a reduced price. That is something you will have to deal with for 6 to 18 months, and isn’t the “end of the world.” I hope nobody told you that stock markets only go up. A correction (20% or more) typically occur every six to seven years, and this one was long overdue.
Action plans for the next 18 months
Don’t panic sell! Don’t panic sell! Don’t panic sell! Listen to the experts, and don’t look at your portfolio for a while. Remember, your goals and risk tolerances haven’t changed. Companies you owned (either directly or in mutual funds) that were good assets two weeks ago don’t simply become bad assets unless something material has changed in the company or industry to reduce their value permanently. This hasn’t happened. This is a “Double Black Swan” event, which is very unusual. Number one is, of course, COVID-19, and number two is the battle for oil supremacy between Russia and Saudi Arabia as they attempt to damage competitors and hurt geopolitical rivals.
Redeem stocks/mutual funds only if you need to. This may occur, for example, if you are retired or if you need funds for childrens’ education. Even then, redeem only what is absolutely necessary. Keep a level head and wait for this panic to pass, just as every other crisis in the last 100 years has passed.
Remember history, because it’s critical for sound decision-making at this time. In the last 30 to 40 years we have seen a number of steep market corrections: Black Monday (1987); the dot-com bubble (1999-2000); 9/11 (September 2001); and the credit crisis (2008-09). After these declines, did the markets recover? Not only did they recover but the markets went on to new record highs within two years (or less) after the event.
Sometimes the market recovered within a few weeks, as it did after 9/11. More typically it takes about a year to fix the structural issues that triggered the downturn in the first place.
Can I make money in these market conditions?
Remember the famous Warren Buffet quote: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Greedy when others are fearful. What does this mean? It means you buy when others are panic selling. This is the fastest and best way to earn a return of 30%-40% in a year with very little risk. Why little risk? After a correction of 20% or more, the risk is already mostly removed from the markets. This doesn’t mean the stock market can’t drop further, but it does mean much of the damage has mostly already been done. Don’t try to wait for the absolute bottom, because that’s very difficult to foresee. Be satisfied with getting a “close-to-the-bottom” price. The first part of Buffett’s maxim means that you don’t buy heavily when markets are near record highs and people are fighting to buy, which inflates prices.
If you have money on the sidelines sitting in cash or cash-like investments, call your advisor and buy before the market retraces all its losses. If you have $100,000, you could, for example, invest $10,000 a month to take more risk off the table. If you do buy, it tells me that your advisor has done a good job of educating you and that you will be fine in the mid to long term.
If the current market conditions are causing you a lot of grief and you are losing sleep over this because of “losses,” my advice is to hold tight, wait for the recovery, and then move to a more balanced or income-earning portfolio to reduce future volatility. You will sacrifice some return, but your health and sleep are more important. You must understand and be happy with your investments and be okay with your risk/reward balance.
Bruce Loeppky is based in Surrey, B.C. and is registered with Portfolio Strategies Corporation as a mutual funds person. He is a regular contributor to the Fund Library. He can be reached at firstname.lastname@example.org.
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The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please contact the author to discuss your particular circumstances.