Between the acceleration of inflation and geopolitical events, the future of the markets is uncertain.
“It’s one of those times when you feel like anything can happen. […] A lot of people are worried about what’s going to happen in the short term,” says Robb Engen, financial planner at Boomer & Echo in Lethbridge, Alberta. “It’s really a different situation than, say, the crash of March 2020, which was almost over in an instant, before things started to roar again. »
While experts agree that no one can predict an impending stock market crash, there are some strategies young people — who may not have seen the market dip before — can use to ensure they’re in a good position if that were to happen.
Investors who have been in the market for a while lived through the oil crash of 2015 and the financial crisis of 2008. Some may even have seen the bursting of the tech bubble in 2000 and stock market crashes, continues Andrew Dobson, financial planner at Objective Financial Partners in Toronto. If these people have learned to hold on to their investments at those times, another downturn won’t affect their behavior and they’ll stick with those lessons. “They have acquired immunity,” says Dobson.
“I think the people who will have trouble with this are new investors who bought investments right before the pandemic — when we were seeing a significant amount of volatility — or right after, during the rally. Mr. Dobson believes that these people might not have seen their investment grow much during that time. For example, if someone bought at a high price or is currently in a negative position, they may have the wrong impression of the stock market and wonder if they are on the right track, he explains, especially if a crash were to occur.
Control what you can control
For his part, Mr. Engen notes that investors should reflect on how they felt and reacted during the crash at the start of the pandemic, in March 2020, and consider how this could set a precedent on the how they would react to a prolonged downturn. “Were you eager to invest and grow your portfolio at that time, or were you in a panic and wanted to cash out? ” he asks.
Mr Engen’s advice to investors is to “control what you can control”, i.e. your savings and spending, and invest in a low-cost, globally diversified portfolio and appropriate to the level of risk one is willing to endure in good times and bad.
“We are bombarded with messages about the daily movements of the markets trying to get us to do something. We believe we should navigate downturns or exit underperforming sectors into a better performing sector. But we have no control over that,” says Engen.
“There is so much evidence that we are not good at timing the market or picking winners and losers. If we are guided by our emotions in investing, we will chase past winners and sell losers. We should do the opposite. »
Instead, Engen believes investors should find an investment solution that works for them, regardless of current market conditions.
For example, he noted that in recent years investors have shifted to US equities, while he preferred to invest 100% in a global equity portfolio using the VEQT exchange-traded fund. Vanguard. Someone might look at this and wonder why they didn’t just invest 100% in the benchmark US S&P 500 index, since they would have had better returns than with that broadly diversified portfolio. world. “It’s true, but I didn’t have a crystal ball to know this result in advance,” explains Mr. Engen.
Diversification is a good idea
Investors who have seen the S&P 500’s stellar performance over the past few years could put all their money in US stocks and expect to outperform other investments, he points out.
“Some investors might go even further, believing that it’s actually just the big tech stocks like Apple, Amazon and Facebook that are generating all these returns, so they’ll just invest in tech stocks individually or building on the NASDAQ 100.” And, some investors might target an even sharper subsection of the U.S. market, focusing on tech disruptors like electric vehicles or robotics — and invest only in those companies, he explains.
“But the more concentrated a portfolio, the wider its range of possible returns. That’s why global diversification is a good idea — you get a narrower dispersion of returns and a more reliable long-term outcome. »
The difficulty, he continues, is that investors want all the advantages of a good market and none of the disadvantages of a bad market, which can cause investors to overestimate their risk tolerance in bull markets and then panic. when the value of their investments falls.
“Like a good deal where both parties are giving up something, maybe the sweet spot for investors is an asset allocation that provides a little lower upside in good times, but also a little more downside. weak in bad times. »
And when it comes to young investors, Mr. Engen observes that he often hears that they are looking forward to a market drop, so that they can take advantage of some lower prices, especially because the markets have risen almost continuously. since 2009.
“For those with a stable job and the cash to save, young investors should welcome a market downturn, as it will allow them to buy more stocks at better prices and expect higher prices. better returns on these stocks. »