Taking Action in Volatile Markets - When You Just Have To “Do Something”
Making the right investment decisions can help you achieve long-term success
When market turbulence increases, as it has dramatically over the past year in the aftermath of the credit crisis, the natural impulse for investors is to “do something”. But it’s not just about taking any action. Before determining how you should respond, it’s important to maintain perspective and understand the risk-return trade-off as it applies to your unique situation to help clarify what course of action is right for you.
Explore your options
Essentially, there are three directions to consider in today’s uncertain environment.
- Reduce your risk
If current market volatility is too stressful for you, you might need to make adjustments to better align your investments with your level of risk tolerance. You can consider the following risk reduction strategies with an advisor:
- Adjust your equity exposure
Portfolios with a relatively higher allocation to stocks will fluctuate more with the equity markets. If you decide to decrease your equity exposure, your advisor can help to identify the best approach to adjust your asset mix, which could include selling investments with higher risk or investments with similar objectives and performance.
- Take a balanced approach
While equities have historically outperformed over longer time periods, bonds have performed relatively better in bear markets. A portfolio that is appropriately diversified across cash, bonds and stocks can lower the overall risk of the portfolio and smooth out long-term returns.
- Convert losses into tax savings
Any capital loss triggered by selling investment that has declined in value can be used to offset capital gains on other investments. As you adjust the equity exposure in your non-registered account, you may be able to use this strategy to help reduce your overall taxes payable.
- Capitalize on opportunities
If you want to take advantage of opportunities arising from today’s volatile market, there are different ways to approach this.
- Make an additional investment
For growth-oriented investors, the credit crisis has created an opportunity to buy stocks of many market-leading companies at attractive price levels. This is an opportune time to position your portfolio with quality equity investments for long-term success.
- Take a disciplined approach
An effective way to gradually increase your equity investments is to invest regularly through a systematic investment program. This is a simple and convenient way to instil a disciplined approach in your portfolio, while taking advantage of dollar-cost averaging through regular investing.
- Stay the course
If staying the course is the right action for you, it doesn’t necessarily mean “do nothing”. The key to long-term investment success is to continue to focus on best practices through all types of markets.
- Swap weak performers for strong performers
Volatility may have created timely opportunities to assess and upgrade your portfolio. It’s important to focus on investments that are well positioned for the future and holding them over time.
- Rebalance your portfolio regularly
The asset mix of your portfolio tends to drift as market values of investments change over time. Regular rebalancing realigns your strategic weightings, thereby maintaining the right level of risk in the portfolio.
- Be mindful of costs
Over time, even a marginal difference in costs can make a meaningful difference in returns. Ask your advisor to find out about the fees you’re being charged and how they compare with other similar investments.
- Understand the impact of currency
Exchange rate fluctuations, as we’ve experienced with the Canadian dollar over the last couple of years, can have significant impact on investment returns. Understand the currency exposure within your portfolio and the options available to you to address this important variable.
We can help keep your investment plan on track
Talk to an advisor today to determine your risk-return trade-offs and to identify the best course of action for you. An advisor can provide guidance in building a diversified portfolio for long-term success and help ensure that market volatility doesn’t lead to short-term investment decisions that pull your plan off track.
