This article is sponsored by RBC Dominion Securities.
The last two years have been tough for everyone. We’ve been through a once-in-a-100-year pandemic that seems to just keep coming up with new variants. Politics have become more bitter and divisive than ever, with conspiracy theories and fake news flourishing on all sides of the political spectrum. A devastating war is raging in Europe while supply chain issues and tight labour markets continue to plague nearly every corner of the globe. And likely related to all of the above, inflation is now spiking to the highest levels we’ve seen in more than 40 years.
It’s little wonder that many of us are feeling mentally exhausted. To make matters worse, every time we read a headline or turn on the news it seems like something even more terrible is about to happen that could wipe out all our hard-earned savings, just when we thought we’d finally adjusted to the latest “new normal.” But while the fear and exhaustion we’re all experiencing is both real and understandable, it’s not a great basis for making investment decisions that could potentially impact the rest of your life.
The whole point of having a clear, long-term financial plan is so it can help us stay calm and rational in the face of even the greatest uncertainties. Right now, it’s fair to say that things are pretty uncertain. There’s simply no way we can predict the outcome of the conflict in Ukraine, how many interest rate hikes it will take to get the inflation genie back in the bottle, or whether the state of our politics will ever become more civil again.
As a result, many investors may be feeling like it’s time to take some of the pressure and anxiety off by cashing out a large portion of their investments and heading to the hills to wait out the storm. But while that might sound tempting, the rational side of our brains tells us that the only way such a dramatic move would be a good idea, is if we were 100 per cent certain that the markets will be lower in the future than they are today. That’s quite a risky bet to make, especially considering that historically, the markets go up nearly 75 per cent of the time.
Of course, as with every period in history when uncertainty became the rule of the day, there always seem to be some unique extenuating factors which suggest that this time, cashing out really is the best option. Just turn to your favourite financial news network or website, and you’ll find no end of pundits forecasting that the fed is about to tighten the screws, and doomsaying about how stocks “always drop” when interest rates go up.
But if we look past the current news cycle and dig a little deeper, it quickly becomes clear that the vast majority of these predictions simply don’t stand up to scrutiny. You won’t see this mentioned in the paper, but in the last six market-tightening cycles, the S&P 500 still realized an average compounded annual return of around 9.4 per cent. While that won’t set any records, it can hardly be considered a disaster – unless you were one of the investors who cashed out at the first signs of trouble, and missed the chance to participate in that growth as you sat on the sidelines, waiting for the crash to happen.
The reality is, today’s crises – no matter how bad they might seem – will all eventually become yesterday’s news. While some will be worse or more memorable than others, without exception, the markets always ultimately adapt, recover, and then move higher. That’s why the policy of simply staying invested has always been a winning strategy over the long run – and this time is no different.
If you want my advice, the best way to weather this storm (and all the others that will inevitably follow) is to create a sound, reliable, long-term plan, and then stick to it no matter what else is happening around us.
If you are retired or nearing retirement, such a plan would include setting aside enough savings in cash or guaranteed deposits to cover your income requirements for several years, so you won’t have to sell at a loss if the markets experience a temporary downswing. The plan would also call for having a portfolio that is tax efficient, which can provide for any legacy you wish to leave behind, and which is diversified enough to reliably deliver a specific target rate of return over time.
While this may sound straightforward, it’s important not to underestimate the power of panic to drive even the most experienced investors into making some very bad decisions. But then again, that’s why we have a plan in the first place. Because when it comes to your investments, current events will always be trying to grab the wheel. A written plan is a key part of what we all need to stay on course.