Preparing for Market Volatility
Updated: Aug 17
Think about time in the markets – not timing the markets – that can help achieve your financial goals.
Stock market volatility can make any investor jittery. After all, it can place your investments in the path of potential harm. When that volatility occurs alongside a stream of doom-and-gloom headlines and troubling economic forecasts, it’s natural to question your investment commitment. Experts in investor behaviour say the urge to suspend investment activity, or worse, to flee the markets altogether, is not uncommon. However, making this kind of snap judgment works against the reason most people invest in the first place: to try and improve their long-term financial position.
When it comes to market volatility, it can be reassuring to pause and look at how they have responded to some of the biggest downturns of the past – which can take some of the emotion out of a manageable situation.
Volatility can work both ways
At the beginning of the COVID-19 pandemic two years ago, many investors faced a serious threat to their equity investments. The crisis triggered a sudden market slide that quickly became a crash. But something strange happened: a swift recovery ensued, and before long, market fortunes surged to record highs. This reversal surprised even some of the most seasoned financial experts, who had figured that large-scale job losses, business closures and travel bans would lead to a recession. But instead, equity markets reclaimed their losses (with the help of government stimulus programs and falling interest rates), sped past pre-COVID levels and kept rising for another year. Volatility, it appears, can work both ways.
The downside of the 2020 market crisis was swift and costly – especially for those who panicked at the news and sold their assets. Investors who cashed out may have missed one of the best opportunities in years to benefit from the upward trend that followed over the next 18 months. Had they stayed invested, they may have not just recouped any losses but benefited from even more impressive gains.
This table shows how some of the major stock market indexes performed in 2021.
Being out of the markets at times like this can be a lost opportunity to potentially increase your holdings when stocks are trading at reduced prices. Since there’s no way to accurately predict when the next market upswing will happen, it can be beneficial to stay invested and take advantage of the process as it unfolds.
Regardless of whether a market slide is brief or is drawn out over a longer period, the experience can be unsettling. However, looking at history can be a source of optimism, to reveal that even downturns and corrections after major events are temporary in nature and are usually followed by stretches of growth, as seen in this chart.
Market downturns are often followed by periods of market gain
Source: Bloomberg, Capital Markets Strategy (at February 7, 2022)
The road to achieving your long-term financial goals won’t always be smooth and straight. Markets will rise and recede in reaction to any number of circumstances, but they won’t be knocked entirely off course. Having the patience and determination to see a downturn transform into a prospective opportunity gives credence to the most quoted market directive, “buy low, sell high.”
Volatile times may test your ability to stay disciplined and focused. But being mindful of some key guidelines can make it easier to follow through on your strategy.
Maintaining a balanced portfolio of equities and fixed income assets can help to offset market jolts since stocks and bonds tend to react differently to a given economic condition. A balanced portfolio therefore, can offer protection during equity downturns and offers opportunities to buy stocks at a discount before they rise in a market rebound.
Consider the safety of guaranteed investment products as well, such as segregated fund contracts* with Guaranteed interest accounts (GIAs) that offer Maturity and Death benefit guarantees, regardless of where the markets stand at the time. An added benefit is that these types of investment offer additional tax, estate planning and potential creditor protections.
2. Don’t miss the best days
Investing isn’t a race. The idea is more about taking a moderate, long-term approach to building wealth rather than sprinting at once towards every opportunity or trying to time the best days for the biggest gains. Since there’s never been a foolproof way to pinpoint when those days will come, being fully invested throughout can position you to possibly benefit when they do. Dollar-cost averaging can help you take advantage of both the positive and the negative swings in the market – and take your mind off the daily ups and downs.
Markets bounce back. This graph shows how the average return on the S&P/TSX Composite Index grew a $10,000 investment to more than $64,000 over the past 25 years.
Source: Y-Charts: February 15, 2022
3. Keep calm and carry on
Remind yourself that reacting too emotionally and impulsively can lead you away from your investment strategy. When markets falter, treat it as an indication that a simple portfolio adjustment, not a full-scale retreat, may be all that’s required to protect your investments in turbulent times. That adjustment may even uncover some opportunities.
4. Back to normal
Stock markets rolled into 2022 facing heightened concerns about inflation, rising interest rates and ongoing concerns about COVID-19. Staying invested through it all will take discipline and confidence – but sticking to the fundamentals can help alleviate some of the risks. Working closely with your advisor will also help ensure you spend less time worrying about market volatility and more time looking forward to your future.
 Sources: Yahoo Finance, Trading Economics.com, https://www.advisor.ca/investments/market-insights/after-a-strong-2021-tsx-still-has-room-to-run-nbf