January 26, 2022Money Financial literacy Economy Commentary
5 Tips on How to Invest in Volatile Markets (Or Any Market, really)
These volatile markets are a good reminder that in investing… things don’t always go up.
When I put the question out there about people’s New Year’s financial resolutions, many of you said you wanted to start investing or be better at it. So here’s a 2 for 1 special.. advice on how to invest, and also, what to consider especially in volatile markets.
Here are my top 5 tips and things to consider to ensure you can ride the wave of the natural pullbacks in the market, or any market climate really..
- Time horizon: be mindful of your individual time horizon
Having a long-term view is the healthiest way to invest. Starting early and only putting the amount you’re comfortable not touching for 5 or more years is best. The rest of your liquid assets should be allocated based on your short to medium term needs. For example, if you came to me Nov 2021 wanting to invest all of your liquid capital knowing that in 6 months to a year you’re wanting to use ALL of that capital to buy a home, I would have said not to put that in the market. Just looking at the S&P/TSX Index, the drawdown in just the last 2 months, from Nov 2021 to the time of writing is about 5.20%. You would not be too happy if that’s what happened to the capital allocated to something as important as your family home. Having the portion of your long-term investment capital in the market also ensures that you’re not selling out of the market to meet your needs at inopportune times.
- Proper Asset Allocation & Diversification
Did you know that 90% of your investment returns can be attributed to your asset allocation* – i.e. the portion of your invested capital in traditional asset classes such as stocks, bonds/fixed income, cash and now to some alternative investments like real estate and private equity. Adding to that, having the proper diversification within those asset classes based on industry sectors and geography can help to ensure you have a smoother investment ride.
- Have a Financial Plan.
As a Certified Financial Planner and an Investment Manager, I have and continue to see the value of having an overall financial plan that takes into account all of your personal and financial goals/needs. It serves as a roadmap for you and your family and allows you and your investment manager to decide on an investment strategy that is suitable for you. During the process of creating a financial plan, there is a ton of valuable information and considerations that come to the surface as well – much of which you wouldn’t normally consider.
- Don’t panic. Manage your emotions, and stick to your strategy.
Market corrections are a natural part of investing and if you’ve already considered and gone through steps 1-3 above, then you need to stick to the plan. The worst thing you could do is act off of emotion or fear which is actually pretty common to see in volatile markets.
Often when markets are down, getting around the psychology of putting more money to work is a challenge. If you own a company where nothing about it has fundamentally changed – i.e., it still has a strong balance sheet, high/consistent/growing free cash flow, low P/E and healthy dividend - buying more of it may feel uncomfortable, but could actually be quite prudent, and may even be a part of your investment strategy.
Trying to time the market is next to impossible – as the old adage goes in my industry – “it’s time in the market vs timing the market”. Staying invested, especially during times like this can feel uncomfortable, but as seen below, if you’re out of the market for even a short period of time when the market is outperforming, you can substantially reduce your return potential.
One strategy to combat this, is the use of Dollar Cost Averaging – investing a fixed dollar amount on a regular basis will help control the effect of market volatility by smoothing out the average cost of your investment.
- Ask for help.
If you see the value in investing but these concepts seem overwhelming to you or it seems like too much work to keep up with the changing tides of the markets – reach out to an investment professional.
As always, I am very open to having conversations about investments and more specifically your own personal financial needs – so please reach out and we can have a quick introductory chat!
I will leave you with some great words from the Great Warren Buffet:
“The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.”
Time in the market vs. Timing the market
*Source: Brinson, Singer Beebower Study, Financial Analysts Journal, Feb. 28, 1991