If there’s one thing that the pandemic has taught us, it is to expect the unexpected. The financial markets hit all-time highs to start the year, despite what has been happening on the ground. As markets advanced, many stocks invariably became winners. This has helped to drive confidence in many investors. While investing during bull market times may appear to be a winning strategy, longer-term investors should not forget that markets are cyclical in nature.
Seasoned investing involves a variety of elements that may easily be overlooked during good times. Over recent months, with the rise in attention to low-cost and commission-free platforms, many investors have found success in simply trading on momentum and noise, without understanding the fundamentals of their investments. In times like these, the prices of securities often become stretched, but over the long run the markets will generally correct themselves to reflect the fair value of the companies traded.
A recent study looked at the trading activity on a popular commission-free platform over the past two years. It showed that the top 0.5 percent of stocks bought each day experienced return reversals, or losses, of approximately 5 percent, on average, over the following month.1 Why did this happen? According to the study, many of these investors were inexperienced and tended to chase performance. Furthermore, the commission-free nature of the platform encouraged trading, which led to speculative behaviour.
Seasoned portfolio management also involves managing risk. As advisors, we use techniques such as asset allocation, diversification, and rebalancing, while taking into account an investor’s risk tolerance and time horizon, to adjust and help protect portfolios throughout the inevitable market cycles. Our focus is to help preserve capital, while generating wealth over the longer term, recognizing that most investors will be investing over multiple market cycles.
What will happen during a market downturn, a time in which some investors may panic or make rash decisions? Professional advice can help to manage emotions during these critical times — something that many investors may find challenging. A study that tracked investors over a longer period of time showed that self-directed investors significantly underperformed the markets over time, likely because they acted on emotion.2 These investors often traded too frequently, having a tendency to sell winning investments more quickly and hold on to losing investments in the hope that they would regain their losses. The study concluded that, in the words of Benjamin Graham, “the investor’s chief problem — and even his worst enemy — is likely to be himself.”
Wealth management advice can often go beyond investing. This may include exploring tax-efficient strategies, planning for retirement, using asset protection or enhancement tools and even supporting estate planning. There are many resources available to help guide the path to achieving your financial goals. And, by having support for the management of your wealth, you can focus on what is important to you.