Remember Christmas time last year when stocks were getting pummeled and everyone was calling a crash that looked like 2008? Well guess what? If you sold everything you owned at that point you just ended up realizing missing out on over 10% in gains. That’s exactly how much the markets have rebounded since hitting their Christmas lows.
Just how have the markets fared since Christmas:
- S&P 500 up 13.6%
- TSX up 11.0%
- MSCI EAFE up 9.1%
And you know what. This could be all the gains for this year. The markets could end up going sideways or down for the remainder of the year. That’s because the gains have already been phenomenal to since Christmas and it’s not going to continue on this trend all the way to December this year. It’s not sustainable.
Keeping Your Emotions In Check
It’s market gyrations like this that we should always preach patience and a long term outlook when investing. It’s also another reason why we should never try to time the market. That’s because we never know when or why the market goes up or down. All we know is that we’re banking on the economies to continue to grow.
Someone who sat on the sidelines since Christmas would have missed out on an entire year’s of gain already. It’s also possible that someone that just started to invest at the beginning of last year would have realized 20% in losses after the markets fell. This is emotional investment at its worst. We fear losing money so we either stay out or get out the markets.
What Do Emotions Cost You?
When you invest with emotions and you do stupid things like liquidate your investments you always do more harm than good. If that’s you then this is the consequences of your actions. I always like to math it up:
The above numbers follow the simple Canada Couch Potato portfolios that I tell all beginners to follow. Using a simple 60/40 portfolio of ETFs, 2018 would have had an aggregated net loss over the course of 2018. Someone that panicked and sold at the end of the year would have realized a loss of 2.11%.
But what happens to the person who doesn’t care about the noise and just continues to hold on. Well fast forward a couple of weeks into 2019 and the person would have recuperated all the losses. That’s just how crazy the markets work.
If you were one of those religious people that re-balance their portfolios at the beginning of the year then congratulations. You’re the biggest winner. Re-balancing has the effect of selling the winners and buying the losers. This type of behaviour helps us keep achieving gains even in years where the markets seem to go nowhere.
Use Your TFSA
My favourite activity at the beginning of the year is topping up my TFSA. That’s my method of re-balancing my portfolio with ETFs. Rather than selling and incurring any kind of commission fees, I tend to top up my investments and re-balance my portfolio by adding more money to the losers than the winners. This has the same impact as re-balancing without having to sell any assets.
Yet with how poorly markets did at the end of the year it’s not hard to fathom that people just sat on the sidelines. Waiting it seems has it’s consequences as well. See what investors have already missed by not investing earlier:
There’s a stark difference already just a couple of weeks into 2019. Someone that sold and never re-entered the markets is around a full $436 dollars behind. Even someone that didn’t sell, but hasn’t actioned on their cash is behind $170. This is where time in the market has it’s advantages. Trying to time the market just never works. It’s better to just buy and hold. All the turbulence in the markets will work it’s way out in the long run.
Stay True To Your Goals
It takes repeating over and over again that it’s important to stay true to your investment goals. The first two weeks of 2019 has already shown that not following your plan can incur financial consequences.
Since 2019 has already been so volatile with stocks rising so fast, don’t expect this behaviour to continue. As I’ve mentioned, these rises in the markets are not sustainable. Investors have to be wary that interest rate hikes could still be possible. Markets will probably continue to be volatile.
If these markets conditions make you feel uneasy, then perhaps it’s best to readjust your portfolio weightings to meet your risk level. The most important advice to take for 2019 is to ignore the noise. In the end it’s the long term that counts.