It's tough to see a drop in your investment portfolio. It's a financial setback that may make you feel concerned or anxious. Luckily, there's a high chance that this setback is temporary.
Since the beginning of March, when the pandemic first spiked, investors all around the world have experience market volatility.*
(*Market volatility refers to dramatic swings or ups and downs in the markets.)
When the stock markets go down drastically, it's only natural to want to do something to reduce the volatility. Perhaps you want to sell your investments or make changes to your portfolio. But if you already have a diversified portfolio,* that may not be the best thing to do right now.
(*A diversified portfolio includes various assets like stocks, fixed income, and commodities. These assets may react differently to the same economic event. The value of one may rise while the value of another may fall. This lowers your overall risk because no matter what happens in the market, some assets will still have gains.)
"If you have a diversified portfolio and your financial objectives haven't changed, then the best course of action is to stay invested in the markets," says Sun Life Financial advisor Brian Burlacoff.
Why stay invested, even in a volatile market?
Because historically the markets have bounced back and recovered.
Many different events have sparked volatility in the past. But if you look to history as a guide, you'll see that these events play out in a similar way.
Whether it's SARS in 2003, the swine flu in 2009, Ebola in 2014 or Zika in 2016, there's usually a similar pattern that follows, says Burlacoff. Currently, the COVID-19 pandemic has driven a lot of economic disruption.
"When the event occurs, markets become volatile. They move to the downside, but then they eventually recover," he explains. "The pattern here is that markets are always upwardly biased in the long run. A diversified portfolio is always upwardly biased in the long run."
Even through problems like the Tech Meltdown in 2000 and the Financial Crisis from 2007-2009, the market has recovered from downturns and produced gains, adds Burlacoff. And, those who stay invested have realized these gains over the long term.
Check out the webinar below to see how long it took for markets to bounce back after previous pandemics like SARS and economic events like the Financial Crisis.
What happens if you sell when the markets are down?
First, you'll turn a paper loss into a real loss, explains Burlacoff. Then, once you're out of the market, you'll have to decide when to get back into the market.
"When markets start to recover, they often recover swiftly, significantly and unexpectedly," says Burlacoff.
So what happens when markets recover unexpectedly? "You have to be in the market to get the gains that are there," he says. "And if you're out of the market, you can suffer significant financial losses over a long period of time."
View the webinar below to see how much you may end up losing on your investments if you sell and how you benefit from staying invested.
Keep your financial goals on track
If you want to keep your finances on track through this pandemic, start by asking yourself these three questions:
1. Have your financial goals changed?
2. Do you have a diversified portfolio?
3. How comfortable are you with risk?
If your goals haven't changed and you have a diversified portfolio, then you may be better off staying the course and sticking to your original plan. Remember, history tells us that markets grow over the long term.
Are you worried about volatility risk or inflation risk? Or maybe you're concerned that your portfolio lacks diversification? In such cases, talking to a professional may help.
This is a good time to reach out to your advisor if you have one, or to find an advisor if you don't. (Many advisors now provide consultations by phone or video chat.)
An advisor can help you:
- make well-informed decisions,
- understand what your risk tolerance is,
- make a plan and build an investment portfolio that meets your long-term goals,
- feel assured in times of uncertainty, knowing you've taken steps to prepare, and
- avoid making emotionally-driven decisions about your savings.
Watch the webinar
For more information on what to do when the market drops, watch Burlacoff's webinar below.
In this webinar, he explains:
- how to get comfortable with market volatility and investment risk, and
- why it pays to stay invested.
This article and webinar video is for information and illustrative purposes only. It's not intended to provide specific financial, tax, insurance, investment, legal or accounting advice. It does not constitute a specific offer to buy and/or sell securities. We've compiled information in this article and webinar from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.
© Sun Life Assurance Company of Canada, 2020