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Most investors understand that markets go up and down, but there are times when these swings are especially dramatic. During these big swings, investors can be tempted to either BUY when the market has risen or SELL when the markets are down. Intuitively this can make sense. No one wants to miss out on the party when things are going well, and likewise we have been quite rightly conditioned to flee when things look dangerous.
But are these the right things to do when it comes to managing our investments?
The short answer, and one often quoted is “no, of course not”, however this can be easier said than done. The mantra may well be “buy low and sell high”, but the average investor’s behaviour is typically the exact opposite.
As indicated above, it is easier to put money into the market AFTER it has been doing well. This is especially true if that winning streak has lasted 6 months or more. Conversely, it is also much harder to buy securities after a downturn, especially if the sell-off meets the definition of a Bear Market, i.e. down 20% or more.
The biggest selloffs of equities by retail investors have typically occurred after markets are already down 20% or more. This was true in 1987, 2001 and 2009 (and almost certainly again in March 2020, although the data will obviously not be in for a few more weeks). These same investors then buy back into the market only after it has had a large recovery. How does this impact their portfolios? They lock in their losses at or close to a market bottom, then miss out on most of the recovery before feeling it is safe enough to go back in.
How would this look in a $1,000,000 portfolio? We will use the crash of 2008-09 as our example with a start date of September 15, 2008 since this was just before Lehmann Brothers collapsed and the crash began. All values reference the S&P 500 $US (in our opinion, the most indicative of the overall economy).
|Market Value on Sept 15, 2008:||$1,000,000|
|Market value on October 6, 2008 (SELL TO CASH):||$ 710,000|
|Value of cash on March 9, 2009 (market bottom):||$ 710,000|
|Buy again on April 19, 2010 (after 20% recovery):||$ 710,000|
|Market Value on Dec 31, 2019:||$1,165,235|
In this scenario the investor would be up 16.52% over the entire period. What would have happened if they had stayed invested instead?
|Market Value on Sept 15, 2008:||$1,000,000|
|Market value on October 6, 2008 (DOESN’T SELL):||$ 710,000|
|Market Value on March 9, 2009 (market bottom):||$ 630,000|
|Market Value on Dec 31, 2019:||$1,767,182|
The client who chose to stay in the market has achieved a total return of 76.72%. In other words, this client is over $600,000 wealthier than the investor who sold midway through the crash and waited until “it was safe” before returning!
Yes, the client who remained invested looked much worse at the market bottom, but their patience and courage were more than rewarded.
This story can be repeated with every previous market downturn in history. While this time may be different, we at CH do not believe this to be the case. The stock and bond markets are reflections of the long-term performance of the economy. If we could somehow successfully predict when the economy would go into recession, AND THEN ALSO when it was about to recover, we might be able to perfectly time the market. But the reality is no one (including the best economists and investors in the world) has been able to do this successfully over time. To do so means we would need to be lucky both when we sold, and likewise when we bought back in again. Instead, we believe it is better to remain patient, and trust those investment managers who have successfully navigated through prior market crisis events. The partnerships we’ve created with these managers are very strategic; we trust them with our own personal assets and fully believe in their abilities to make smart investment decisions. This holds true when times are good, and also when they are a bit less certain.
This isn’t the first time the markets have acted the way they have over the last few weeks – and even though these are unprecedented times, so were 1987, 2001 and 2008 while they were unfolding. History has proven time and again that unless you have a crystal ball, the biggest financial payoff in times of uncertainty is to hang tight. Just ask Investor Two!
With tax season upon us, we’re pleased to offer a special door-to-door tax package collection service from the CH team. The team and I are available to personally collect your paperwork from your home or office, remaining at a safe social distance, of course.
To book a time, simply contact our Office Administrator Hayley on email@example.com or 403 237 6570 and we’ll be there. And if you need us to pick up anything else while we’re out and about, don’t hesitate to ask. For our out of town clients, please continue to send us your tax information as normal.
As social distancing and self-quarantining continue, some of us may be going a little stir crazy. Everyone has plenty of advice on how to stay entertained while self-isolating, but the best advice we’ve heard is this: relax and accept it! This may your once-in-a-lifetime opportunity to try something you’ve always wanted to do.
To help keep you entertained, the team at CH put together a list of our favourite top 5 things to do while self-isolating at home. We hope you enjoy them!
1. Get cultural. You don’t need to don your top hat and tails to enjoy Calgary’s arts and culture scene – you can enjoy live streaming music, films and more from the comfort of your couch. Check out
Calgary Philharmonic Orchestra Watch + Listen, Studio Bell’s Alone Together: NMC’s Top Ten Canadian Livestreams and the Calgary International Film Festival’s CIFF at Home. For a list of local attractions and online tours stop by Tourism Calgary’s website.
2. Get cooking. There’s no better time to get creative and get into the kitchen. Short on ingredients? Check out. SuperCook – simply add what you’ve got left in your cupboard and SuperCook instantly finds matching recipes. Or stock up your pantry with great local produce from grocery delivery companies such Cultivatr – Alberta’s online “Farmer’s Market” or The Grocery Link. If you’re not feeling inspired, try one of the gourmet meal kits like Supper Studio that come with pre-measured ingredients delivered right to your door.
3. Get fit. Quarantine or not, there’s still plenty of ways to stay in good health. The other day I took my family walking around a golf course – we were the only souls there and it was blissful. Alternatively, you can visit one of the top Calgary fitness studios offering online classes (often free) for yoga, barre and more such as crushcamp.com or Barre Body Studio.
4. Get smarter. Take this time to learn a new skill or even a new language. Choose one of 14 languages at Babbel or learn how to play the ukulele – one membership with Yousician gives you access to an array of cool instruments.
5. Get in touch. Now is a great time to reconnect with friends and family. Feeling connected is vital to our well-being, particularly now, so reach out to let people you know you’re thinking about them. Try signing up for free programs like Zoom video calling or Skype, or simply pick up the phone and have a good old fashioned chat with someone you’ve lost touch with. And don’t forget to follow us on CH Financial LinkedIn and check out our latest blog posts on CHF Insights.
From the entire team at CH, please stay safe and healthy. We’re all looking forward to a time when we can breathe a collective sigh of relief and see you again in person. In the meantime, please know we’re working hard on your behalf, and that will never change.