Tag Archives: stock market

The stock market crash that never came

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It’s been 10 years since the global financial crisis bottomed out. Since then stocks have basically been on an uninterrupted tear, with the TSX doubling in value, and the S&P 500 nearly quadrupling in value. In that time, investors have survived the European debt crisis, Greece’s debt crisis, a Russian financial crisis, the Brexit decision, Trump’s election, and countless other doomsday predictions.

Markets have reached all-time highs so frequently that investors are understandably nervous about an upcoming crash. The problem is, nobody knows when a crash might hit, if ever, or how severe it might be if it does occur. Stocks may continue to go up for a few years, or maybe go sideways for a while, or we might suffer a small correction of 10-15 percent before the next bull market begins.

The tech bubble and financial crisis are still fresh enough in our minds to convince investors that declines of 40-50 per cent are normal, when in fact these were major black swan events that perhaps we’ll never see again.

Investing at all-time highs

Let’s say you’re a nervous investor who decided to get out of the stock market at some point in the last 10 years, whether due to Europe, Brexit, Trump, or simply because the markets were looking “expensive.”  What’s the cost of waiting for a correction? It turns out to be quite high.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

The Cogent Advisor blog looked at U.S. investment returns over the period 1927 through 2016. That’s 91 years, or 1,092 months. The average monthly return was 0.95 per cent. But when they removed the returns from the best performing 91 months, the remaining 1,001 months provided an average return of virtually zero (0.1 per cent). In other words, 8.5 per cent of the months delivered almost 100 per cent of the return.

Their takeaway: Even if you believe the probability of a correction is high, it’s far from certain. And when the correction doesn’t happen, the expected opportunity cost of having waited is much greater than the expected benefit.

The Crash That Never Came

One reader who I’ll call Jason emailed me and confessed that while he used to invest in index funds he got nervous after Trump’s election and moved everything to a full service wealth management firm last year. He didn’t say in the email, but I can imagine he stressed this concern with his new advisor, who placed him into a conservative portfolio aimed to provide downside protection in the event of a crash.

Here’s Jason, one year later:

I just took a look at the past 12-month performance and it was 3 per cent vs the market of ~13 per cent. I have a sinking feeling I made a mistake and should move it back to self manage using index funds.

I sent my advisor a few questions and basically got the answer that they protect the downside, and have a lower risk targeting 4-6 per cent average over five years.

I still feel nervous, but at age 42 I think I should be more in the market. We have been at all-time highs for a while so I am torn between a bear market that may start now and the downside protection would be warranted. That said, maybe not.

Continue Reading…

Is fear keeping you out of the stock market?

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The biggest concern for many investors is the fear of losing their money. The stock markets have shown some volatility the last few weeks, and the recent screaming headlines in the financial media do nothing but encourage panic.

Some people think the latest bull market has overvalued stocks and a major market meltdown is imminent. They are sitting on their cash and waiting for the right entry point.

According to a BlackRock survey, 70% of adults aged 25 to 36 are also clinging to cash assets. Apparently, these Millennials don’t have much trust in the stock market and are afraid of another large market crash. This puts them at risk of not having enough saved to enjoy a comfortable retirement.

It’s true. Investing in equities does carry risks. Market corrections (drop of about 10%) are common. Bear markets (drop of 20% or more) will likely occur during an investor’s lifetime.

Even a reasonably diversified portfolio of stocks lost about half of its value during the 2008-2009 market crash. However, avoiding equities completely isn’t the best strategy. The stock market can be good to investors who have the discipline.

What can you do to get over your stock market fears?

1.) Educate yourself

Combat your fears with knowledge. Learn the basics: how the markets work so you can prepare yourself for future market conditions. The more you know, the less afraid you become, but avoid information overload.

Stop reading the gloom and doom reports in the financial media. Your financial education should not come from the news media. They need something to report and tend to sensationalize short-term market events to grab our attention. Just because something appears in print doesn’t guarantee that the information is correct. Look for reliable sources.

Investing magazines and books can provide useful information.

Knowledge is freely available on the Internet. Basic investing information is available at sites like Get Smarter About Money and Canadian Securities Administrators. Some social media sites, forums and financial blogs are worthwhile if written by knowledgeable authors.

Lack of confidence and second guessing yourself can paralyze your decision making. If you’re afraid of picking the wrong investments, turn to a professional for help. You could also try one of the many well-publicized model portfolios that have yielded good returns.

2.) Take a long-term investing approach

The biggest fear of investing is losing a lot of money in a short period of time.

Investing is a long-term process and is most likely your only way to reach your long-term financial goals.

Consider the benefit of investing sooner rather than later. Time is on your side.

Don’t keep monitoring your portfolio. This is psychologically hard, but don’t let short-term losses bother you too much. No one likes losing money, but it will be temporary. You’re not going to need this money to survive tomorrow, or next month, will you?

Acknowledge short-term market risks, but trust in long-term historical gains and commit to long-term investments. Continue Reading…

What if I sold in May and went away?

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At the end of April we wrote a piece looking at some new research on the calendar effect and popular heuristic known as Sell in May and go away.

While there is some evidence that this particular anomaly does exist and has persisted over certain periods of time, there is not really a good theoretical foundation for why it happens.  Mining historical data often yields patterns but assuming that those patterns will repeat can lead to unfortunate investor strategies and behaviours.

It’s in our nature to love short-cuts

Investors just love short-cuts. In fact not just investors love them but people in general always use heuristics to help increase the efficiency of their decision-making.  If you step outside, feel a sudden cool breeze and look up and see a dark cloud in the vicinity you respond fairly quickly and sensibly by seeking shelter or at least grabbing an umbrella as you head out the door.  This ability to create short-cuts makes our lives so much easier and sometimes even keeps us safe.   We recognize patterns that we’ve seen before, assume they’re going to happen again and act almost automatically in response: it simply makes decision-making faster and less difficult. No need to analyze things in detail, just act.

The challenge is that the same heuristics that make decision-making easier and faster or keep us safe in many aspects of our lives can also produce behavioural biases that don’t help us as investors.  We love things like the “January effect” or “Sell in May and go away” because they’re easy and have sometimes worked in the past.  But putting them into practice doesn’t always work out the way we might imagine.

But short-cuts don’t always work with investing

This year is a good case study.  What if we had sold in May and stayed out of the market through until now?  To cut to the chase, you wouldn’t be happy!  A Canadian investor would have missed out on the following returns from May 1 until now (all in Canadian dollar terms – return data from S&P Indices Canada and exchange rates from Bank of Canada as at December 7, 2017):

S&P/TSX Composite Total Return Index: +4.6%

S&P 500 Net Total Return Index (in CAD): +4.7%

S&P Global ex-US Broad Market Net Total Return Index (in CAD): +4.8%

Continue Reading…

How to prepare for market corrections and advances

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“Motivation is what gets you started. Habit is what keeps you going.” —Jim Ryun, Olympic runner

We’re working our way through the fourth quarter 2017. Many stock indices have been hovering near their tops and often keep making new highs. Daily headlines are typically a mixed bag of fears and optimism. They are often interpreted as indications of possible changes in market direction.

Some themes really stand out. For example, NAFTA talks are topics du jour in the US, Mexico and Canada. The United Kingdom is wrestling with Brexit implications. German politics are entertaining altering the seating arrangements.

Many stock indices hover near their tops and keep making new highs.

China faces pressures from increasing debt levels. US tax cut battles keep marching along. Several faces will soon change at the US Federal Reserve. Rising interest rate discussions send chills down the spines of borrowers. These few points alone are forceful enough to create trepidation in investor minds. You will have no difficulty finding headlines for every investment neighbourhood.

As a result, investors develop itchy fingers that want to migrate to the safety of the sidelines, whether it’s beneficial or not. Of course, these investors that have the need for action will make the crucial timing calls on what to buy or sell. Everyone should know by now that timing the markets is a low percentage approach, fraught with many dangers.

My Observation

This brings me to one important observation. Wise investors are in the habit of investigating what it takes to be well prepared for both market corrections and advances. They have at least sketched out a rough game plan for each case on the back of the napkin. Something to get started, aiming for the right path. I encourage you to become conversant with what you would likely do with stocks and bonds during bullish and bearish markets.

Most investors that think in this fashion prefer to have some framework of how to approach the uncertainties that come their way. Just some simple ideas are required to get started. The best news is that today’s planning is being conducted while stock prices are high.

Finding the motivation to be informed is a welcome initial step. Perhaps, discussions with your investment professional will shine more light on what actions are in your best interests. Reconfirming your family risk profile is also time well spent. Hopefully, these efforts lead to more disciplined planning for the precious nest egg. The main mission is to reach and deliver your retirement objectives.

Seasoned investors are well aware that diversification and rebalancing strategies are part and parcel of this logical planning approach. I cannot emphasize that enough as nobody knows where the markets are headed or when a directional turn comes around the curve. Bells do not ring when the time is ripe to make portfolio changes. Neither at the top, nor at the bottom.

My Recommendation

I suggest mulling over these situations in preparation for your exercise: Continue Reading…

A snapshot of Canadian investors’ appetite for risk: Vanguard’s Canadian risk speedometers

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Figure 1: Vanguard’s Canadian risk speedometers, September 30, 2017

By Todd Schlanger, Senior Investment Strategist, Vanguard Canada

(Sponsor Content)

As part of Financial Literacy Month in Canada, we are proud to announce the launch of Vanguard’s Canadian risk speedometers.

These speedometers were originally designed by my colleagues in the United States to provide a factual representation of how investor risk appetite is trending today, relative to the past.

In order to generate the speedometers, we calculated net cash as a percentage of total assets under management, (in this case, within the universe of Canadian mutual funds and ETFs) into high-risk and low-risk asset categories. We then looked at the relative cash flows into high- versus low-risk asset classes, relative to history.

The end result is a risk measure that can be tracked through time and displayed in a risk speedometer index, as shown in Figure 1 over the 1-, 3-, and 12-month periods ending September 30, 2017. When risk appetite is above its historical average — such as over the 12-month period — the needle is to the right of centre, indicating higher risk appetite. When the needle is to the left of centre, risk appetite is below average. In addition to the current risk appetite readings, we also display the prior 1-, 3-, and 12-month readings for comparison.

Notes: Vanguard’s risk speedometers measure the difference between net cash flows into higher-risk asset classes and lower-risk asset classes, in this case within the universe of Canadian mutual funds and ETFs. The lighter-shaded areas represent values that are within one standard deviation of the mean, which means they occur roughly 68.2% of the time (34.1% higher and 34.1% lower). The middle shades represent readings between one and two standard deviations from the mean, occurring 27.2% of the time (13.6% higher and 13.6% lower). The dark edges represent values more than two standard deviations from the mean, occurring the remaining 4.6% of the time (2.3% higher and 2.3% lower). Speedometer values for previous periods may change from what was initially reported as the current value in prior periods because of changes made in Morningstar, Inc., data, and to the updating of the five-year average.

Along with the risk speedometers, we will be providing underlying asset category details (the top winners and losers in each category) in terms of net cash flows and changes in assets under management that resulted in the current risk appetite readings, as shown in Figure 2 (for the same periods, ending September 30, 2017).

Figure 2: Highest net inflows and outflows Continue Reading…