Don't let reversals of fortune alter your long-term plan

Certain countries and sectors are seeing big changes from last year. That doesn't mean you should change your investing strategy.

Michael Keaveney 6 May, 2016 | 5:00PM
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Michael Keaveney: How are Canadian mutual fund investors doing so far in 2016? We took a look at all of the mutual fund categories and it's striking to see the reversal of fortune from 2015. In some key equity categories such as U.S. equities, European equities and Asia-Pacific equities, we have seen a downtick in performance versus 2015. Conversely, Canadian equity investors who lost money in 2015 are now back in the black with positive returns.

So what's driving that reversal? For foreign investments, the primary driver has been the Canadian dollar. Unless you were in a currency-hedged fund, the Canadian dollar, which dropped in 2015, helped your returns. In 2016, as the Canadian dollar has strengthened, that has hurt your returns if you've been investing in foreign markets. Within Canada, we saw a significant rebound in precious metals stocks, material stocks and energy stocks, all of which performed poorly in 2015 and are doing quite well thus far in 2016.

What are the lessons for investors? Well, the main lesson is that there's a risk around thinking that what happened in the past will continue on into the future. Our brains are hardwired to think that trends will continue. This is known as recency bias. But we know that short-term trends don't last forever. Valuations of beaten-down companies will often rebound and present opportunities, especially if the companies have made adjustments. On the flipside, companies, economies, sectors and even currencies can face new challenges and headwinds that were not anticipated before.

The real lesson is that past performance is not a guarantee of future return and that you should stick with your long-term investment plan.

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Michael Keaveney

Michael Keaveney  Michael Keaveney, CFA, is Director, Investment Management at Morningstar Associates, Inc.

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