A Calm Approach for Canadian Investors Amid Market Uncertainty
Every time we see a market correction, our team tends to get a number of calls and emails from our plan members asking about their investments – and what they should do. Depending on how you define “correction”, that means we’ve been through this around 25 times in the four decades of Capital Planning. The triggering incident is different each time, but the end result has followed familiar patterns.
Market corrections—short-term declines in stock prices—are unsettling, but they are also a natural and healthy part of investing. While it’s completely understandable to feel concerned during times like these, it’s important to take a step back, keep a long-term perspective, and focus on your financial goals. Let's explore why staying calm during market volatility is often the best course of action, and how history can provide a reassuring perspective.
Understanding Market Corrections
A market correction typically refers to a decline of 10% or more from a recent peak. While these events can be nerve-wracking, it’s worth remembering that market corrections are not unusual. In fact, they have occurred several times throughout history, and the markets have always recovered.
To put things in perspective, here are a few statistics on past market corrections:
1. Tech Bubble Burst (2000): The bursting of the dot-com bubble led to a market correction where tech stocks fell dramatically. The recovery took time, but the market eventually surpassed previous highs and experienced years of growth.
2. 2008 Financial Crisis: The global financial crisis saw a sharp decline in equity markets, with the S&P 500 dropping by over 50% from its peak in 2007 to its bottom in March 2009. Yet, just a few years later, the market had fully recovered, and investors saw substantial growth.
3. The COVID-19 Crash: In 2020, the global stock markets experienced a quick and severe drop in February and March, with major indices like the S&P 500 plunging more than 30%. However, the market rebounded swiftly, reaching new highs by August of that same year.
The takeaway here is that market corrections are a normal and inevitable part of investing. They can be uncomfortable in the moment, but they don’t last forever. The key is not to make rash decisions in the midst of volatility, but to keep your eye on the bigger picture.
Why You Should Stay the Course
It's tempting to make knee-jerk reactions when the market turns volatile—whether that means selling off stocks or shifting to safer, but lower-return investments. However, history has shown that investors who stick with their long-term plans typically fare better.
Here are a few reasons to stay invested, even during periods of market turbulence:
1. Time in the Market Beats Timing the Market: One of the most important lessons you can learn as an investor is that trying to time the market is very difficult. Market corrections can be unpredictable and trying to jump in and out of the market at the right time often results in missed opportunities.
2. Compound Growth: By staying invested in a well-diversified portfolio, you give your money the opportunity to compound over time. Even if you experience a short-term loss, a long-term strategy has historically outperformed trying to "time" corrections.
3. Recent Rebounds: As mentioned earlier, markets have historically bounced back after corrections. For instance, after the sharp drop in 2008, the S&P 500 had an average annual return of around 15% from 2009 to 2019.
The Risk of Crystallizing Losses
One of the biggest mistakes investors make during a market correction is selling off investments at a loss, which is often referred to as "crystallizing" losses. While it might seem like a sensible decision in the short term, particularly if you’re feeling anxious, it's generally not the best strategy for long-term success.
When you sell investments that are currently down, you lock in those losses—meaning you miss out on any potential future gains as the market recovers. This is especially risky after a correction because markets often rebound quickly once they’ve adjusted. By selling during a downturn, you lose the opportunity to benefit from the subsequent recovery.
Why Now May Not Be the Best Time to Move
Given that the markets have already undergone a correction, making significant changes to your portfolio right now could mean missing out on any gains when the market bounces back. In fact, trying to time the market by moving to cash or defensive investments during a correction can result in underperformance.
For example, when the market drops, stocks are usually priced lower, which means you're effectively selling at a loss. If the market rebounds shortly after, you’ll be left on the sidelines, having missed the recovery. Furthermore, making emotional or reactive decisions based on short-term market movements often leads to regret when the market turns around.
Actions to Take (or Not Take)
During times of market stress, it’s important to keep your emotions in check. Here are some thoughtful actions you can consider:
Review Your Asset Allocation
Market volatility is a great reminder to revisit your portfolio’s asset allocation. If you’re nearing retirement, you might want to ensure that your portfolio is balanced and aligned with your risk tolerance. On the other hand, if you're younger and have a longer investment horizon, you may feel more comfortable with an allocation that leans toward equities.
However, make sure that these decisions are part of a long-term strategy, rather than reactive moves to short-term market shifts. Avoid making drastic changes in response to recent market downturns.
Contribute to Your RRSP Regularly
One of the most effective ways to take advantage of market volatility is to continue contributing to your RRSP. In fact, downturns can offer a buying opportunity—when prices are lower, you’re purchasing investments at a discount. This approach, known as "dollar-cost averaging," can help you reduce the impact of market timing by spreading out your contributions over time.
This is why contributing to your RRSP through Payroll Deduction can be so valuable. It keeps you contributing – automatically – even when there is that part of you that is screaming to avoid risk. Almost by accident, you end up buying into companies when they are at a massive discount – and then when things climb up again, you grow along with them.
Avoid Crystallizing Losses
Don’t make the mistake of selling your investments just because the market has dropped. It’s crucial to resist the urge to "crystallize" losses. If you sell now, you lock in those losses and forgo the chance of benefiting from the eventual market recovery.
Consult with a Financial Advisor
If you’re feeling uncertain about your portfolio or financial strategy, it may be a good time to reach out to a financial advisor. They can help you review your risk tolerance, rebalance your portfolio if needed, and ensure that your investment strategy is still aligned with your retirement goals.
Looking Forward with Confidence
While it’s easy to get caught up in the noise of daily market movements, remember that the stock market, over time, has a tendency to go up. The Global Average Annual Stock Market Return for the past 80 years was 8.5% per year. Even adjusted for inflation, the Real Return is about 5.5% per year. That factors in these short term fluctuations. This is why the most successful investors are often those who take a long-term, disciplined approach.
That’s why it’s so important to stay the course, avoid locking in losses, and let your long-term investment strategy work for you.
A Partner Through Every Market Cycle
At Capital Planning, we’ve guided clients through four decades of market ups and downs. That experience has taught us that patience, perspective, and a steady hand are the true hallmarks of successful investing. If you're feeling uncertain about your portfolio or simply want to ensure your plan is aligned with your long-term goals, we’re here to help. Our team of experienced advisors is ready to support you with thoughtful guidance and personalized advice—whether you’re building wealth, preparing for retirement, or navigating change. Reach out to us anytime. We're in this together, for the long run.