BY: FAZAAD BACCHUS
There is an investment cycle that plays out every single time. It starts like this. First, there is optimism, you see your friends are all investing and you hear good things in the market, so you decide to venture out, maybe with a TFSA or RRSP. Then as you see your money grow, excitement steps in and you are encouraged to put more in. You begin to check your statements more regularly and the thrill of investing has gotten in your veins. The next stage is euphoria, you can’t believe you have put this off for so long and you imagine the amount of money you could have made had you started earlier. This is your point of maximum financial risk.
Soon the market tops out and the downward cycle begins. Suddenly there is a fall in stocks and you hear in the news that the markets have fallen 300-500 points and you wonder what this all means in relation to your investments. At this point anxiety steps in, you start thinking about the market more than you want to, but it’s on your mind, you cannot afford to lose your investments. The market drops a little more and you are in denial about what is happening, saying to yourself that it couldn’t be that bad it’s going to stabilize. It doesn’t, and fear steps in, you actually fear that you may lose all your money, so you become desperate and you begin to panic because you are in a state of despair.
Then you make the biggest mistake an investor can make, you sell off your investments at your desperate moment and suffer a great loss. You vow never to get back into the market and that’s the end of your investment spiel.
So, what to do when the markets are in turmoil?
The first thing to remember is that “time in the market overrides timing the market”. There will always be volatility and to predict the market is a fool’s wisdom, no one can. It’s better to stay away from your investments and concentrate on other important things as the news of a falling market can really get to you causing you the emotional upheavals previously mentioned. The secret to investing is “a buy and hold strategy”, meaning that you buy a few good and diverse funds and hold them. They will not perform every year as you would like but over time they will. Think of your portfolio as a “yo-yo” it goes up and it comes down. Now think of you spinning a “yo-yo” while you are walking up a flight of stairs. Yes, it goes up and down but gets higher with every step you make. If you look at the stock exchange you will see that this up and down happens every day by the minute, and while some days are better than some, there has been a significant overall gain over time.
The most recent market crash you may remember was 2008, markets fell 43% and most people who cashed out lost money because the following year markets were up by 48% and five years later it was up by 102%. During periods of market downturn, talk with your financial advisor and let him/her be your sounding board as opposed to the news. Stay invested.