Ruth Saldanha: The Ontario Securities Commission recently released the findings of a survey on the effects that the coronavirus pandemic has had on retail investors. The OSC believes that understanding how the pandemic affects your experiences and behavior is key to protecting yourself. We agree. My colleague Ian Tam is the Director of Investment Research for Morningstar Canada and he's here today to help you avoid any of the pitfalls mentioned in the survey findings. Ian, thank you so much for being here today.
Ian Tam: Thanks for having me, Ruth.
Saldanha: The survey found that 47% of investors are experiencing increased levels of stress during the COVID-19 pandemic. We always recommend that investors try and stay calm before making investment decisions. Why is that?
Tam: Yeah, it's a great question. People generally have a pretty strong emotional connection to their wealth simply because wealth affords you all the necessities to get on with your life like food and shelter. So, that actually make a lot of sense for investors to have that emotional tie. But that being said, emotions are generally the worst possible thing to rely on when you're making investment decisions. And as people it forces us to make rash decisions typically at the wrong times. Now, if you were watching the market pretty closely throughout February and March and you saw the market fall in Canada 30% in matter of a month, it's obviously very difficult to detach yourself emotionally from that.
So, looking backwards at it, of course, we now see that had you stayed invested and kept your emotions out of it, you actually would have recovered a lot of that portfolio value. So, that seems – obviously, COVID-19 is a pretty specific incident. But if you actually look over the last 100 years or so on the TSX, for example, you would have seen corrections like this happen multiple times over and over again. And each time the market does tend to correct itself and recoup a lot of its value. So, detaching yourself emotionally even though it's hard to do is probably one of the most prudent things you can do as an investor. And at Morningstar, we say it's simple but not easy. And certainly, emotions are the part of that equation that makes it not easy.
Saldanha: It's interesting that you say that people make rash decisions at the wrong time because another finding of this survey was that investors with low financial knowledge were the most likely to sell 20% or more of their investments as a result of the pandemic. So, how should we make decisions on buying, holding or selling?
Tam: So, generally speaking, the less you muck around with your portfolio, the better. One thing to try to keep in mind is the concept or idea of goals-based investing which is tying your investment to a very specific purpose, whether that'd be retirement or paying for school or some other expense in the future as well as some specific time horizon. So, before you make that decision to buy, sell or hold, maybe you think about what fundamentally has changed about your financial position. So, did you lose your job, do you have a change in cash flow or has your goals changed? If none of that has changed, really, there's not much you need to do over the short term with your portfolio other than simply rebalancing it just to make sure that your asset allocation is tied to your risk tolerance.
Saldanha: Oftentimes we encounter things that we don't understand. So, how should investors approach complex strategies and products?
Tam: So, by the very nature of investments, the world is pretty complex. So, strategies can vary in style as well as vary in risk. So, for a retail investor, it's very important to be comfortable with what you are investing in. and there is a very standardized way that in Canada we are able to assess that. So, when you purchase a mutual from an advisor, they are obliged to provide you with a fund facts document and on there, there's going to be a standardized risk rating, so low through to high. So, you definitely want to pay attention to that regardless of how complex that investment structure is. That will be a standardized measure for you to gauge how risky it is, which is of course the most important thing. The second key word you might want to look out for is leverage. Leverage is like rocket fuel to an investment. It's going to accelerate the returns upwards as well as downwards and for a lot of retail investors that's going to add a lot more risk than you can probably handle in your investment portfolio. So, certainly, maybe keep an eye on that word leverage just to make sure that you aren't involved if conservative investing is your approach.
Saldanha: Finally, is there any way for investors to protect themselves against frauds or scams?
Tam: So, broadly speaking, Ruth, the Canadian regulatory system is pretty sound. But if you do end up participating in an investment, a very good thing to do is make sure you speak with a registered investment advisor. And when I say registered, there are two main bodies in Canada, MFDA and IIROC, both of which are self-regulating organizations which actually oversee all of their members. So, as a registrant of MFDA or IIROC you're basically obligated to conduct your business in a certain way, typically for the benefit of the investor. So, certainly, speaking to a registered advisor will help avoid any fraudulent activities.
Saldanha: Thank you so much for joining us today, Ian.
Tam: Thanks, Ruth.
Saldanha: For Morningstar, I'm Ruth Saldanha.
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