Invest Well. Live Well: Winter is coming — is your portfolio prepared?

For the select few who have never watched Game of Thrones, the Stark household is lord of the North. The Stark motto — “Winter is coming" — was a warning to remain vigilant and prepare for the inevitable harsh winter.

It should not be surprising that they are my favourite family in the series.

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What does Game of Thrones and the Stark house have to do with investing?

Given 2019 has been a great year for both stock and bond markets, our message has been "Winter is coming." Global trade tensions, slowing economic growth and among the longest economic expansion in history suggest investors need to prepare for the certainty of uncertainty.

Why do we need to prepare? Because behaviour tends to get in the way of our financial goals.

Rewind to December 2018, when stock markets had the worst December since the Great Depression. Many investors were not prepared for that kind of drop and, as a result, we had a few, despite our caution, panic and sell out near the bottom. The result was a long-term, if not permanent, drop in their wealth. We want to help improve investor decision-making so reactions like this do not occur.

Most investors understand that markets fluctuate. Through our discovery and investment process, we ask many questions, including what level of "portfolio pain" an investor can stomach. What we have learned is that one's tolerance in positive markets is quite different than negative markets because our human instinct kicks in with a fight or flight response.

There are many studies around behavioural finance. Arguably the most compelling is Dalbar, which publishes annual research showing that since 1998, the average American investor underperforms the U.S. stock market (S&P 500) by more than 30 per cent because emotions drive them to buy high and sell low.

No one can predict the future and trying to guess what markets will do in the short term is futile. What we can do is prepare for tough environments.

Here are five things investor can do to help prepare for winter:

1. Know your goals: If you do not have a plan, how can you tell if you are on track or if any course corrections are required? Investors who can tie their portfolios to their goals and values tend to make better decisions than those who only look at performance. One way to do this is to review your retirement plan. We have several clients who have learned they do not need large returns to meet their goals. Consequently, they can opt for a lower risk portfolio and smoother ride.

2. Take a step back: As emotional beings, we can get caught up in the moment. Pausing and looking back at how far you have come and understanding you have weathered storms in the past can help reframe your thinking. As our late grandmother would say, "This, too, shall pass.”

3. Dollar cost average: Saving for your goals on a regular basis not only reinforces good financial habits, it helps remove the guesswork of "Is now a good time to buy?" Furthermore, if markets drop, you benefit by buying low.

4. Stay invested: Despite sounding obvious, you cannot time the markets. Trying to get out ,then get back in, has rarely worked. It can also be helpful to understand how often markets drop and how long it takes to recover. A 2019 study from JP Morgan shows that since 1979, the U.S. stock market drops an average of 14 per cent some point during the year, but ends up positive 83 per cent of the time.

5. Rebalance: Given a prosperous 2019 thus far, we have been "harvesting" gains in anticipation of winter (downturn). We don't know when it will occur, but as all seasons come and go, we know it will. Setting aside emergency or fun money now can help you to be more resilient in the future.

Among the best analogies I have heard about our profession is that we should act like a thermostat. When things are hot, we temper the excitement and take profits. When things are cold, we inject hope, logic and help avoid rash decisions.

Until next time, Invest Well. Live Well.

(written by Keith Davis)

This document was prepared by Eric Davis, vice-president, portfolio manager and investment advisor, and Keith Davis, investment advisor, for informational purposes only and is subject to change. The contents of this document are not endorsed by TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc.-Member of the Canadian Investor Protection Fund. All insurance products and services are offered by life licensed advisors of TD Waterhouse Insurance Services Inc., a member of TD Bank Group. For more information, call 250-314-5124 or email Keith.davis@td.com.

 

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