Ryan Michalczuk
March 15, 2022
Good reads Monthly commentary In the newsUncertain Times in the Market
Uncertain Times in the Market
When uncertainty hits financial markets, one of the first questions some clients will have is should I sell and go to cash. During these times, it’s good to pause and reflect on your goals and objectives. Part of our process as your advisory group is to fully understand your goals and objectives, and to keep on top of any changes to them. This helps ensure we have the proper portfolio in place to help you achieve your goals.
In the spectrum of all client situations that are possible, there is likely only a small percentage of investors who would need to make drastic changes to their portfolios during market volatility. Here are some questions that help us to qualify this:
- Do you need to withdraw all or most of your capital within the next year?
- Are your accounts invested 100% in the stock market?
- Will your lifestyle change drastically and dramatically as a result of a short-term market correction?
If you answered ‘No’ to these questions, you can take comfort in the fact that you likely don’t have to make drastic changes to your portfolio.
Even if you did answer ‘No’ and realize that you don’t have to make drastic changes, we understand that some of you will feel uncomfortable with volatility and the uncertainty that it brings. This is why we have built portfolios that are designed for these situations. We plan for contingencies in the following ways:
- None of our discretionary portfolios, even the most aggressive ones, are invested 100% in the stock market.
- Within the portion of the portfolio we have invested in the stock market, we own many companies that are less volatile than the market and pay income higher than the market. While this may give us some upside in an up market, it cushions the downside in a down market. We own companies in these industries that move less than the overall market: Utilities, Telecom, Real Estate, Pipelines, Infrastructure, select Technology and Consumer Staples. Goods and services that are less discretionary in nature. Things people need on a day to day basis – the necessities of life.
- We have exposure to Gold in the portfolio which can provide a hedge against inflation and geo-political risk.
- In times of uncertainty, bond yields decline. We have exposure to Government Bonds which benefit when this happens.
- We have US Dollar exposure and our experience has shown that the US Dollar seems to get stronger in times of uncertainty.
- We are holding more cash than normal that can be used to buy more of our favorite businesses while they are on sale.
Aside from the realization that one does not need to sell, and that the portfolio has some built in protection that minimizes losses, we also remind clients about the dangers of market timing.
History shows us that the largest positive days for the stock market happen during some of the most uncertain times. There is a lot of research on this topic. Consider that from 2001 to 2020 there were a total of 5,036 trading days. Investors who stayed invested over that time period made 7.4% annually. Those who missed the 10 best days had their returns cut by more than half to 3.3%. That’s 10 days out of 5,036! Those who missed the best 20 days had their returns cut to 0.7%. Market timing is very costly. Our experience has been that clients who sell and go to cash only get back in to the market after it’s too late, and they miss out on some of the best returns available.
We have had a few clients over the years who have realized after the fact that they didn’t need to sell; we have already put measures in place to minimize downside and it is costly to go to cash; however, even after these points, they still want to make some changes.
If this is the case, we recommend ‘incremental’ changes. This means taking maybe 10% of your portfolio, and moving it into a GIC. This will lower your overall risk, and we recommend accepting that lower risk is more suitable for your situation from this point forward. Having said that, the 10% you removed from the portfolio and put into GICs should stay there for the long run. You then don’t have to worry about ‘getting back in to the market’.
If the market goes up, you won’t feel you have missed out as you won’t be 100% in cash. If the market goes down further, you will feel good that you made some changes to reduce your downside.
While elevated levels of volatility can be disturbing, it will pass, just as every other similar event has passed over history.
Source:
Ryan Michalczuk is an Investment Advisor with CIBC Wood Gundy in Windsor, Ontario The views of Ryan Michalczuk do not necessarily reflect those of CIBC World Markets Inc. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2022.