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Market volatility is high … learn about the simple investment strategies that can help in turbulent times

Sebastien Chevrier - Mar 20, 2020
With the pandemic rapidly evolving, uncertainty is also fueling dramatic levels of turbulence in financial markets and the economy

As I write this, COVID-19 (the Coronavirus) is dominating the headlines and uncertainty surrounds our daily lives. These are indeed extraordinary times.

With the pandemic rapidly evolving, uncertainty is also fueling dramatic levels of turbulence in financial markets and the economy: witness falling stock markets, interest rate changes and government intervention, all further exacerbated by the oil conflict between Saudi Arabia and Russia. Not surprisingly, this unsettling volatility may have you wondering what to do about your investments.

Predicting the coming weeks, months or even the next year in the stock market with any certainty is impossible, even at the best of times. That said, I can share some historical perspectives that make an encouraging case for the market’s overall, longer-term resilience and some simple strategies that could help manage the risks and uncertainties that come with investing.

Resilience: Market recovery follows market setbacks

First, consider the reaction of markets to disease outbreaks over the past 50 years. As the accompanying chart illustrates, in a span that includes HIV/AIDS in the 1980s, SARS in 2003, and MERS and Ebola more recently, the overall trend of world stock markets remains decisively positive. Downturns, while dramatic at times, have proved relatively short-lived.

 

Long-term gains: The case for staying the course

While there’s no avoiding volatility, history shows that recovery typically follows downturn and stock prices are positive over the long term. A related historical finding, illustrated by the graph below, shows that by switching out of stocks and sitting on market sidelines, even for a few days, could have significant negative impact on your long-term returns.

 

Staying power: Strategies to help you stay invested

There’s no getting around market volatility or the fact that markets have negative returns sometimes. After all, there is a lot at play when it comes to market behaviour, including interest rates, currencies and even investor emotion. But there are simple strategies that can help make the steep downturns and upswings less distressing. For example, asset allocation – spreading your assets among different classes of investments (stocks/bonds/cash) – can help smooth out the fluctuations because asset classes tend to react differently to market conditions (see chart). Your allocation of assets should appropriately reflect your tolerance for loss (risk tolerance).

The same goes for individual stocks. You can lessen the impacts of the upward and downward swings in the value of your stock portfolio by holding the right mix: stocks from companies with different features – in different sectors or industries, of different capitalizations (sizes), different regions/countries. ETFs offer an efficient way to take advantage of all these aspects of diversification.

A well-diversified portfolio could mean you don’t miss out on potential gains and your overall portfolio could achieve consistently reasonable rates of return.

In these times of heightened uncertainty and turbulence, you may be wondering what to do next. Whether you need help rebalancing your asset allocation, questioning what to do in current market conditions or looking for a steadying hand to avoid making costly mistakes due to emotional decision-making, we are here to help guide you.

In the meantime, we wish strength and resilience to all and especially the physicians and other healthcare professionals who are leading us in this extraordinary battle.