The hardest decision in investing

When and how should you get back into equity markets after panic selling?

Ruth Saldanha 6 May, 2020 | 1:48AM

 

 

Editor's note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.

Ruth Saldanha: For many investors, the steep downturn of March and April this year brought back bad memories of 2008. To avoid getting more burnt than they already had been, several investors fled to cash, exiting their equity portfolios to safeguard them from further losses. But is now the time to get back into equities. The Chief Investment Officer of Steadyhand Investment Funds, Tom Bradley has called this decision of when to get back into the market after you get out the hardest decision in investing. He is here today to talk about why. Tom, thank you so much for being here today.

Tom Bradley: Thanks for having me, Ruth.

Saldanha: First up, does panic selling ever work? Put another way for individual investors, does it ever pay to go with your gut?

Bradley: Well, I know some pretty savvy investors and – who have a pretty good gut. But for the vast majority of investing the gut – you going with your gut does not work indeed. And indeed, investors like me have taken Warren Buffett's lead, and we actually trade against the average investors gut. And what I mean by that is, you'll remember Warren's great comment about it's time to be – "be fearful when everybody is greedy, and greedy when everybody is fearful." And that is exactly speaking to the fact that generally, when times get tough, stocks are down.

The gut that we're talking about is actually churning. And the easiest way to relieve that pain is to do something like sell out. So, yes, it can work for sure. But I think what makes it so hard and why I call it the hardest decision is not the first decision to sell, it's the second one and it's only successful strategy if you get both decisions, relatively correct. And we'll talk about that for sure. But I should say that this isn't just sort of an imaginary issue BlackRock did some research late in the cycle, the last cycle, we had '09 to call it to '19. And their research showed that Canadians on average had over half of their retirement assets in cash or cash like instruments. So, BGICs and things like that. Many, many Canadians missed the last bull market because they were so scarred by what happened in '08, '09. And so, this is a very real issue out there for investors.

Saldanha: And is that the reason that this decision is perhaps the hardest one investors will make?

Bradley: You know, there is lots of reasons, I'll give you three. First of all, if you think about going from, you know, an average investor goes from a balanced portfolio all to cash they are so far from their long-term plan, farther than they've probably ever been. And so, the stakes are really high. Now, they'll sleep better for a few nights because their portfolio won't be bouncing around. But one of those mornings they're going to wake up, and they're going to realize they have a huge decision because they're so far away from where they should be. So, I think, you know, if you think about trying to put the puck in the net or write an exam, when the pressure is really on, that tends to lead to poor decisions. And so, I think the fact that the stakes are so high, you're so far away from where you should be is one of the problems.

The other one is that you get – in our society, we get constant reinforcement as to why it's the right thing to be out of the market. The media machine is generally biased towards negative news, the headlines are negative, Page 8 might be positive. And so, there is always something feeding your view that you should stay out of the market and in my observation, it makes it very hard for people to turn around and go the other way.

The third thing I'd mention, and it doesn't always happen, but think about the cases where you sell out and you're wrong. The market, for instance, last month say you sold out in late March, here we are in – heading in – further into the spring, and markets are back up. And, boy, that makes it really tough to get back in because you're so worried about, you've made a bad decision already, and you're worried about whipsawing. So, I think there is just all kinds of things that make it behaviorally. As I say, the toughest decision in investing.

Saldanha: Well, the fear that accompanies these market crashes is understandable. How should investors prepare psychologically to venture into equities and face those volatility again? And are there any investment tips that could perhaps make it easier?

Bradley: You know, it's the $64,000 question, Ruth, I think about this a lot because I do study investor behavior, and I think the main thing is somebody has to, you know, after they get out and things have settled, they need to sit down and think about – go back to square one, what is the purpose of the money. If the money is for a vacation or a college tuition or whatever, that's fine, keep it in cash. But if it is to fund a retirement over 10, 20, 30 years, then they need to figure out what that should look like. So, I think that's number one. Maybe one of the easiest little cues to help get people in us to think about investing only the money that you're going to need in 20 years. Forget about even 10 years, even though that's pretty long term. Think about the money that's longer term, because you should certainly be able to handle the volatility for that kind of money.

The other thing I'd say, and this is maybe a plug-in for Morningstar, but I think people, I often offer them a long-term, even a 100 year chart of stocks, to show them that that chart goes up and to the right and the crash in '87, the tech wreck, the financial crisis of '08, '09 and now the COVID crisis all as you look longer and longer term look more insignificant in the scheme of things. And so, I don't have an easy answer for that one, Ruth, I think you almost got to trick yourself behaviorally, but you do need to go at it.

Saldanha: Finally, what are some of the ways to safeguard a portfolio from volatility?

Bradley: Ruth, you can't avoid volatility in these times. You know, Ruth, all kidding aside, you know, rates are – interest rates are where they are we – you know, our parents talked about the day when they could buy a bond and they earned a 3% or 4% real return after inflation and they didn't have to worry about stocks. That isn't the case today. Fixed income investments safety in the sense is very expensive, so you're losing ground to inflation. So, I don't think you can totally avoid it even as retired. I think, number one, you need to accept that your portfolio – at least part of your portfolio is going to bounce around a little bit. Prepare for it both mentally, but also cash flow wise if you're – certainly if you're retired, make sure you have a spending reserve set aside so that some of – the rest of your portfolio can bounce around.

And then I think the biggest dial that we all have on our dashboard, as far as dealing with volatility is asset mix. So, if you can't stomach the asset mix or the volatility that goes with really aggressive portfolios, then you dial it down on less stocks, on less high yield, on more secure investments like GICs, government bonds, et cetera. So, no easy answer there. And we all have to accept some volatility in our investing approach, but the asset mix is the way to kind of dial it up or down.

Saldanha: Thank you so much for joining us with your perspectives, Tom.

Bradley: Thanks, Ruth.

Saldanha: For Morningstar, I'm Ruth Saldanha.

About Author

Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca