Consider these five personalized investment strategies to help you move forward with confidence during uncertain times.
By Sam Febbraro
Market volatility and uncertainty can leave investors feeling like they are on an emotional roller coaster. Even so, the biggest challenge for investors at a time like this is inaction. To borrow a timely quote from U.S. president Franklin D. Roosevelt “there are many ways of going forward, but only one way of standing still.” We need to avoid the kind of paralysis that can come from fixating on the difficult and daily news to keep moving forward.
First, let’s understand what caused this volatility and what we can expect in a recovery. Then, let’s take a look at what we can do as investors in the meantime.
The Cause and Recovery: Taking Stock
We’ve experienced not one but three “black swan” events in 2020 so far. First, the coronavirus, which spread quickly across the globe. Second, non-essential businesses closed in support of physical distancing which, in turn, stalled most of the world’s economies. Third, the dramatic collapse in oil prices, which have impacted oil-producing nations like ours.
The world as we know it has changed – from the way we work, to how we school our kids right through to how we interact with our loved ones. Unemployment rates are rising rapidly and governments have rolled out significant support plans to buffer both the economy and its people. Throughout this time, markets have fluctuated with incredible volatility and we don’t know if or when a second wave will impact us.
Now, as economies around the world take tentative steps to re-open, we’ve turned our focus to the recovery. All eyes are on the number of new COVID-19 cases, the speed of testing, the apex of the curve, and the eventual hope for a vaccine. Concurrently, in the investment world, economists and media outlets are discussing the shape of the equity market’s recovery. Will it be V-shaped, U, W, or even L-shaped? Irrespective of what transpires, volatility is a normal part of long-term investing and can create attractive opportunities. As you evaluate your personal and family circumstances, there are planning strategies that can help you rise above the daily news cycle, weather the storm, and take back control of your financial future.
Here are five strategies to consider:
1. Review Short-Term Cash Flows: Review your short-term cash needs and long-term investment goals. Try to reduce your discretionary spending and cancel unnecessary charges that occur automatically on your credit cards or chequing accounts. If it makes sense for you, take advantage of lower equity prices to top up investments with excess cash to get your financial plan back on track faster. This can be achieved through a lump sum purchase or by dollar cost averaging into the market with a weekly or monthly contribution plan.
2. Stay Invested: Periods of uncertainty can create considerable stress, and cause panic selling. Conversely, you may find opportunities to take advantage of when markets are volatile. In either case, it’s important to remove short-term emotions and avoid making poor decisions that affect long term goals. Staying invested by maintaining a suitable investment strategy or making appropriate adjustments based on your investment objectives, time horizon or risk appetite is key.
3. Rebalance & Diversify: Maintain discipline and rebalance your investment portfolio to take advantage of short-term market anomalies. This is an effective way to buy positions that are underweight and sell those that are overweight based on your optimal asset allocation strategy. For example, growth stocks have outperformed significantly over the last 10 weeks, while value stocks have declined to even more attractive levels. So, if you have a neutral investment style approach with 50% growth and 50% value, it might be time to rebalance your portfolio and bring your allocation back to neutral. That will mean selling your current winners to buy current losers that have long-term potential. It is also a great time to ensure your asset allocation strategy is appropriately diversified across asset classes and geographic markets to better manage risk.
4. Harvest Losses: Periods of market corrections are also a great time to realize or “crystalize” capital losses to offset capital gains in your non-registered account. In contrast to rebalancing, harvesting a loss is achieved by selling a security that has fallen below your original purchase price. For example, let’s say you hold Energy positions. As the sector has been beaten down quite significantly, some of your holdings would reflect a loss. You can sell the positions and book the loss. When harvesting losses, you will want to maintain your sector exposure, so in this example, you can purchase an Energy ETF to do so. After a minimum of 30 days, you can repurchase the original position. It’s important to consult your financial advisor or tax advisor for this strategy. You can read more on tax loss harvesting here, or review this infographic.
5. Government Programs: Review and apply for available benefits under the government’s Emergency Response Programs to help you ease your cashflow burdens during this time. There are specific programs for individuals, families, indigenous peoples, students and recent graduates, businesses, non-profit as well as for charitable organizations who need to deliver essential services to those in need.
These are difficult times for so many of us and difficult times require some difficult decisions. Working with a trusted financial advisor, who can be an effective sounding board, can help guide you through these uncertain times and provide a critical framework for decision making. Implementing the right strategy for you can help you move forward with confidence.
Sam Febbraro is the Executive Vice President of Investment Planning Counsel.