Economic uncertainty, the U.S. election, interest rate cuts, geopolitical tensions: the list of things that could make you fear investing—or, worse, staying invested!—could go on almost indefinitely these days. Yet one of the keys to becoming a rich investor is to do so consistently and consistently. Another key is simply to remain patient. Here’s a look at some of the basics you should remember as a rational investor.
Know the cycle of emotions
Stock market cycles have always alternated between bull markets and bear markets. When they get going, investors feel a mixture of optimism and excitement. When they reach euphoria, at the peak of the cycle, they feel more inclined to buy, even though, paradoxically, it is at this stage that the financial risks are the highest. Then, when the decline begins, their emotions will often go from an initial fear – the investor will be able to reason with himself for a while – before giving in to panic and discouragement. Since they have lost all hope, they end up getting impatient and selling. The problem is that the bottom of the markets is actually the festival of opportunities… for investments!
These notions seem obvious when stated. They are easy to understand and follow in theory. But the data on inflows and outflows from mutual funds and exchange-traded funds (ETFs) is unequivocal: Investors have a nasty habit of leaving the markets for guaranteed products at the wrong times, Manulife and Bloomberg show.
Patience pays off, though. For example, the annualized return of the S&P 500 from 2004 to 2024 is 10.29%. By comparison, those who tried to time the market in 2008 by selling at the bottom and reinvesting a year later got only 7%. Worse still, those who choose to get out of the market and hold on to their cash get an annualized return of -1%, according to Ycharts.
Tinting your optimism with realism
Let’s take the current context as an example, when the “r-word” is being bandied about a lot. With a recession looming, should an investor wait to invest or temporarily secure their portfolio and come back when things are better? It is true that during a recession, there are observable impacts on the portfolio. Typically, stock markets, regardless of the region affected, show below-average returns in a recession due to the contraction in corporate profits, the compression of valuation multiples and increased market volatility.
Additionally, historically, fixed income tends to outperform equities during these periods, although this is especially true of investment-grade bonds.
So, despite a well-diversified portfolio, investors must be psychologically prepared for their investment portfolio to show some decline during a recession. This is normal. However, trying to synchronize investments with the reaction of the markets to an event such as a recession is not recommended. First, markets usually peak before recessions begin and bottom out before they end. The problem with temporary exit is therefore very concretely all the risks coming from the impossibility of determining the right time to leave the market and to re-enter it.
The main idea is to remain optimistic, and to add to this optimism a bit of realism. The composition of a portfolio must reflect your objectives (in liquidity, income, growth) and your personal tolerance for risks. For example, if you are in a period of disbursement of your assets, it is absolutely necessary to take this into account in your investment objectives. A certain portion of your assets must then remain invested in the long term to preserve your purchasing power.
On the other hand, if you are highly risk intolerant, buying an annuity to secure part of your assets would not be a bad idea. On the other hand, if you are in the accumulation phase, systematic investment is the way to go, because it will allow you to invest at any time without having to wonder when the ideal time is to do so. The idea behind these simple strategies is to limit your potential emotional reactions to market volatility. Which is, I agree, often much easier said than done.