HOW TO BE A GOOD INVESTOR IN BAD TIMES
In the past few months, most of us had a feeling that was eerily familiar: That sense that everything you invested in, whether it was a “safe” bank or a risky tech stock or a “widows and orphans” utility stock, all seemed headed for disaster.
Of course, stock markets are always bouncing off the walls of fear and greed and the past few months just happened to be supported by fear.
In addition to Warren Buffett’s advice to buy on fear, here are four more lessons that you can help you get through downturns without losing sleep or bailing out at the worst time.
1. WHAT GOES DOWN QUICKLY, OFTEN COMES UP QUICKLY
Let’s take a look at a few big stocks: Royal Bank of Canada, Enbridge Inc., Crescent Point Energy and BCE Inc.
In the seven weeks from Dec. 1, 2015 to Jan. 20, these four stocks were down 17.1 per cent, not including dividends. In the following six weeks, to March 4, these four stocks actually went up 20.6 per cent. The net result over 12 weeks was a decline of 1.4 per cent, but, if you add dividends, then these stocks were pretty much flat.
One of the thoughts on t his 12- week j ourney to investment hell and back is that i f you didn’t pay attention for 12 weeks, you would have had no sleepless nights.
A related lesson is that, unless you need cash at that moment, the best option is usually to give markets time to bounce back. If the names of the investments are good ones, they usually do, and sometimes fairly quickly.
2. TRUE DIVERSIFICATION WILL HELP
For those of us who don’t want to get too worried about investments, diversification by type of investment and industry is very important.
If you purchased t he Nasdaq index on March 10, 2000 and held it until Sept. 20, 2002, your investment would have dropped more than 77 per cent. This period and that particular index captured the worst of the dot- com bubble. During the same period of time, WalMart stock was up 4.2 per cent ( including dividends). While two separate investors could have been invested in “stocks” in the same period, one suffered a terrible collapse while the other was up.
If someone put half their money in both, it still would have been bad, but they would be down about 36 per cent, certainly better than down 77 per cent. Taking diversification a step further, the iShares Bond Universe ETF began on Nov. 20, 2000. If one bought it on that date and held it to Sept. 20, 2002, it would have been up 17.1 per cent. The Nasdaq index over the same period of time was down 59.6 per cent.
The key message here is that diversification is when you truly are investing in things that will act very differently over time. Buying 10 different stocks that all happen to be oil exploration companies in Alberta is not a good example of diversification.
For most investors, proper diversification will allow you to better manage the volatility, and help your portfolio maintain much of its value even on days like Jan. 20, 2016.
3. ALTERNATIVE INVESTMENTS CAN BE YOUR FRIEND
In 2015, the TSX was down 8.3 per cent, including dividends. At the same time, the $ 77 billion OMERS Pension Plan was up 6.7 per cent. This was a great result. More interesting was the breakdown on returns: on publicly traded investments, the fund returned 0.7 per cent; on private investments, the fund returned 14.5 per cent! Private investments include private equity, infrastructure and real estate, and represented 48 per cent of the fund’s assets at the end of 2015.
While most of us can’t access the same types of private equity or infrastructure i nvestments as OMERS, there are now some opportunities to invest in mortgages, private debt, real estate and factoring, which usually allow you to earn returns in the five per cent to 10 per cent range with investments that do not react closely to the overall stock market. The learning here is that it is probably time to find ways to build up this part of your investment portfolio, where possible, and it’s most likely these investments will help smooth out overall returns.
4. A LONG- TERM PLAN CAN MAKE A DISASTER FEEL LIKE A BUMP
One of my clearest memories of the crash of 2008 was doing some financial plan reviews with nervous clients. We took their current financial picture, assumed NO growth for the following two or three years ( even though we thought it would be above- average growth) and then continued with slightly lower- than- average growth expectations for the rest of their lives. At the end, if we could show that they would still have almost no risk of running out of money, it provided them with some peace of mind at a time when it seemed like markets were headed all the way to zero.
The plan gave clients a long- term perspective at a time when only short- term fear was in the air. It allowed them to feel comfortable maintaining the course, and to not shift into cash at a very bad time.
For example, consider the S& P 500 over the past year. There have been two meaningful declines, and overall it was down 4.7 per cent from March to March —not inspiring. But, the same S& P500 index, from a 65- year perspective, shows a steady upward trajectory, and should give some comfort t hat things will be okay.
So, the key lesson here is that a long- term view of your personal situation will provide a truly important yardstick of how you will be affected by short- term markets. If that isn’t enough, a long- term view of markets themselves should give you much more comfort than worrying about the daily headlines.