The Canadian stock markets have done it again; they delivered investment gains and then they quickly took them away. Poof! Those stock markets sure moody and unpredictable. Once again those stocks are the unruly kids. The bonds are the adult in the room.
Here’s the 1 year chart for the TSX Composite courtesy of iShares Canada. The chart is for the Index ETF, ticker XIC. The growth includes the reinvestment of dividends.
We see that it has been a tough year for the Canadian stock market and for those who invest in the Canadian market. That’s quite the roller coaster ride. This ride even goes under water before resurfacing to deliver some decent gains, and then to ‘take it all back’. Short term, things look quite ‘scary’.
But there’s a way to make this dip look very small and insignificant. Because guess what, the recent market volatility and drop is insignificant to an investor with a long-term plan and a long-term perspective.
Here’s the 3 year chart. Already we see that the recent correction is not significant. There have been a few ups and downs along the way as the fund went on to turn every $10,000 into $12,000.
And here’s the 5 year chart. Over the period the fund has turned every $10,000 into $13,800. The recent blip pales in comparison to the quite significant correction that occurred in 2014 and into 2015. For Canada, that was an official ‘bear market’ with the TSX falling by over 20% from top to bottom. The Canadian stock markets reacted to the collapse in oil prices.
The recent correction does not even rate as a ‘mini bear cub’.
And now let’s make those recent 1 year of lost gains almost disappear. Here’s the 10 year chart. Ta da! The magic of a long-term perspective. The fund delivered a 125% total return through many ups and downs.
In the 1 year chart, the ride looks like a hair-raising roller coaster ride. In the 10 year chart, the recent event looks like a tiny speed bump on the road to significant wealth creation. And make no mistake the recent stock market drop is insignificant. The key is to put it all into perspective. It might help to know that this is all ‘normal and expected behaviour’. Stock markets go up and down along the way; but historically they’ve gone up significantly over time. For Seeking Alpha I recently penned Add The Recent Stock Market Correction On The List of Things To Ignore. You’ll find an infographic with all of the events and noise that could have thrown investors off of their game as the S&P 500 went on to deliver nearly 9% annual gains. Think of the events below as ‘all the news, er make that noise, that’s fit to ignore’.
If you watch your investments (perhaps not a good idea to begin with) you should expect the value of your portfolio to drop from time to time. Those drops can be significant as well. The key is we expect those portfolio declines and we prepare for those portfolio declines. They don’t catch us off guard; we’re waiting for them. We just don’t know when those stock market corrections are going to arrive, or how long they’ll stick around.
And we invest within our risk tolerance level. I am writing posts for each of the ETF Model Portfolios where I outline the potential declines and time underwater for each portfolio model. My recent post on the Balanced Portfolio, here’s The Classic Canadian Balanced Portfolio. Stocks For Growth, Bonds For Ballast.
The Balanced Portfolios will typically include those key and core building blocks of Canadian Stocks, US Stocks, International Stocks and Canadian Bonds. Investors and portfolio managers are certainly free to get a little more ‘creative’ around the edges.
And ‘here’s the thing’ on that US and International diversification. While the Canadian markets gave it all back, that’s not the case with US and International stocks.
Here’s the US market represented by the S&P 500 Index ETF, ticker XUS. And at times you might also benefit from a nice currency boost if you hold US assets. When the Canadian dollar weakens, you can see an additional portfolio boost based on the strong US dollar.
International diversification is important. As I would tell clients in my days as an advisor at Tangerine ‘the Canadian market does not make for a good investment on its own’. It needs some help, serious help at times. The Canadian market is dominated by financials and energy related companies. It can be more than beneficial to add those US markets that are dominated by the Apple’s, Google’s, Microsoft’s, Walmart’s, Pepsi’s, Costco’s, Home Depot’s, Johnson & Johnson’s, 3M’s, Nike’s, Colgate Palmolive’s and Berkshire Hathaway’s of the investment world. Ditto for the International funds what will give you exposure to so many wonderful and successful global giants.
And here’s an another important consideration. When the markets go down you are able to buy more units or more shares. This is a great event for the long-term investor. Market corrections are a wonderful opportunity to scoop up those shares as they go On Sale! As Warren Buffett suggests … ‘We like it when our shoes go on sale, we should like it when our stocks go on sale’.
But of course, we don’t try to time the markets. We don’t wait for the market corrections as we don’t know when they might arrive. If we are in the accumulation stage, we simply add monies on a regular schedule. We set up that pre-authorized contribution (PAC) and we set it and forget it. And ‘forget it’ is an important distinction. You’ll mostly be buying when markets are going up, but at times you’ll be taking advantage of those lower prices.
The best investor behaviour might be to not look, not worry. But if you do happen to look, and if you’re a chronic Portfolio Watcher, when things get scary – pull back, sit back and take a look at that long-term chart.
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