Concerned about where stock markets are headed? When it comes to investing your money, your main goal is no doubt to grow and preserve your wealth. Investing in equities has historically provided a good long-term rate of return. But it’s easy to forget that when market volatility arises.
When the stock markets fluctuate, your immediate reaction may be to sell your investments and sit on the sidelines. However, lessons from past market crashes and financial events can help you weather potential market downturns. One lesson is that it’s best to diversify your investment portfolio and stay invested.
Here are some examples of recent events and the different takeaways each provided.
Tighter financial conditions
Markets staged a robust recovery after the COVID-19 pandemic, however, equity and fixed-income markets continue to face uncertainty today. Geopolitical tensions, recessionary fears, turmoil in U.S. regional banks, and still-elevated inflation and have led central banks to raise interest rates. While the Fed has signaled an end to its rate-hiking cycle – providing some solace to the markets – this has created a more challenging environment for stocks and corporate bonds.
On the bright side, market volatility is creating an opportunity for active investors to find good value in the market in fundamentally solid, well-operated companies that can still perform well amid a high-inflation environment. The return on market volatility has reconfirmed the importance of holding a well-diversified portfolio, which can help minimize losses in a market downturn.
COVID-19 pandemic
In March 2020, as COVID-19 infections were accelerating globally, countries around the world instituted lockdowns, effectively shutting down their economies. The anticipation of a global recession, and the uncertainty of an unknown virus spreading exponentially, led markets to sell off sharply. The MSCI World index, a gauge of global stocks, dropped 34% from its February 19 peak to its March 23 trough.
The speed of the stock market downturn, and subsequent recovery, distinguishes the COVID-19 market event from past market crashes. In the United States, the S&P 500 recovered to its February 2020 peak in under 6 months, the fastest-ever rebound for a major bear market (when a market experiences prolonged price declines). Aggressive government interventions (such as offering support packages for businesses and individuals), the relative resilience of financial infrastructure, and a virtual world where technology companies benefitted, all contributed to the sharp bounce-back.
2008 Global Financial Crisis
In 2008, banks and investment firms were over-exposed to mortgages granted to individuals with poor credit scores (known as subprime mortgages). While many institutions were not directly involved in the issuing of this debt, they invested in an array of these subprime mortgages. When these subprime mortgages began to default, and the housing market collapsed, banks and investment firms were exposed to significant losses.
This threatened the global financial system and made access to short-term liquidity (the ease with which an asset, or security, can be converted into ready cash without affecting its market price) difficult, forcing governments and authorities to intervene with support packages to rescue financial institutions. Poor regulation and supervision of the financial sector contributed to the sharp market decline.
Out of major market events come major lessons
First, diversification is key. It’s a basic principle that supports long-term success and helps to weather volatility. It’s important to ensure your investments are diversified. Nobody can predict the future, so a well-diversified portfolio is essential. Spreading your investments globally across a wide variety of asset classes, including equities and fixed income, can help reduce your risk.
Another widely agreed upon lesson – stick with your plan and stay invested. The COVID-19 crash and rebound was the fastest bear market recovery in history which highlighted the importance of staying invested and not selling investments during traumatic market events. Those who continued to stay invested during the pandemic benefited from the recovery of the market.
Our solutions for you
Maybe you’re approaching retirement and are feeling nervous about the impact of market volatility on your portfolio. As you start to draw income from your investments, you want to ensure your hard-earned savings last.
Understanding your risk tolerance can help you prepare for market changes and save you a lot of stress. You can determine your risk tolerance by completing this Investment Personality Questionnaire | PDF 2.6 MB.
Or perhaps you’re saving for your kids’ education and are looking for a smoother investment experience and a sense of control as you save to help your kids reach their potential.
Managed solutions provide clients with a well-diversified turnkey solution to invest according to their financial goals and objectives. At Canada Life, we have a variety of managed solutions programs available, from those aimed at mitigating risk to those supportive of specific goals, there’s a portfolio for all types of investors.