A long-term investment plan requires a disciplined approach because when the value of your investments is in flux – and it almost always will be – it’s hard not to let your emotional side take over.
When markets are falling and your investments decrease in value, you may become anxious, or worry about what impact it will have on your overall financial well-being (and consequently your retirement). And when markets take a turn the other way and start climbing, you may become a bit over-confident, willing to take on more risk to see your assets grow further.
These emotions are entirely understandable but acting on them in your investment portfolio can be detrimental.
As difficult as it may be to watch the value of your portfolio decline, try to think of the long-term implications. Here are a few suggestions:
1. Ask big picture questions
There are reasons why you began investing in the first place, which in turn helped determine how your portfolio is constructed. It may be helpful to revisit these goals when volatility picks up to see if anything has changed. Consider asking yourself questions like:
- Are my goals the same now that my investments have declined?
- Is my investment time horizon the same as it was when we built my portfolio?
- Is my financial situation the same?
- Is my portfolio aligned with my risk tolerance?
- Does my portfolio have an appropriate level of diversification?
If the answer is yes to a majority of these questions, then ask yourself why you need to make any changes, particularly knowing that there are risks to getting it wrong. If the only thing that has changed is the short-term value of your portfolio, should this affect your long-term plan? These bigger picture questions can help shift the focus away from the short-term discomfort.
2. Tune out the headlines
During times of market volatility, sensational headlines seem to be everywhere. But if they aren't taken with a grain of salt, the chances of heightened anxiety and emotional reaction increases. No forecaster can accurately predict where markets will go in the short term and no forecaster has insight into your unique situation. And, remember that the performance of any one market is not the same as the performance of your personal portfolio. If you’ve diversified your investments, your experience is bound to be different from the one you read and hear about. So take everything you watch and read with a grain of salt.
3. Stop checking your investments every day
Are you guilty of obsessively checking your portfolio? One way to reduce the emotional impact of market volatility is by simply applying a long-term lens and looking at your investments less often. When negative market performance is all you hear about, increasing the frequency with which you review your investments will only serve to increase anxiety. Despite many reasons not to invest, history has shown that over the long term, markets have charted a positive path out of those negative periods and investors who stayed the course have been rewarded. By not checking your portfolio balance each day, you increase the odds of staying the course and seeing the benefits of that approach over the long term.
Chart illustrates the growth of $10,000 in the S&P/TSX Composite Index (total returns) from January 1, 1973 to December 31, 2022. An investment cannot be made directly in an index. Graph does not reflect transaction costs, investment management fees or taxes. If such costs and fees were reflected, returns would be lower. Past performance is not a guarantee of future results. Source: Bloomberg, RBC Global Asset Management Inc. Values and performance are in CAD.
Source: RBC Global Asset Management Inc.
Thinking about taking a break?
If you are nervous about market volatility and are thinking about moving your investments to cash, it is important to understand that doing so will introduce several new risks to your portfolio. While moving to cash may feel safe, remaining in cash for an extended period of time ultimately erodes your purchasing power. Even at a modest inflation rate of 2%, you will lose 10% of your purchasing power over a five-year period. Inflation is a serious threat to your long-term plan, but it’s less obvious because the face value of your assets don’t decline.
Here are some questions to consider if you are thinking about moving to the sidelines:
- What is my plan for getting back into the markets?
- What are the tax implications of my decision?
- Where should I direct my savings in the meantime?
- How long can I afford to be out of the market while ensuring my goals are still achievable?
- When will I know it is safe to get back in?
- How can I ensure that I do not continue to pull out of the markets in the future?
Many advisors have been through multiple market cycles and have seen difficult periods before. Having an objective advisor who can share their expertise and provide you with advice during difficult times can be extremely important in keeping your plan on track.