VOLATILITY RESOURCE CENTRE

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FIVE TIMELESS TIPS ON MANAGING MARKET UPS AND DOWNS

The notion of investing in the stock market without volatility is as illusory as a car without an engine. Like it or not, the two concepts invariably go hand in hand. But does that mean you should avoid volatility – and investing – altogether?

The short answer is no. Market uncertainty can naturally cause panic and lead to poor investment decisions. Yet, by recognizing short-term market uncertainty for what it is, you can help ensure that it doesn’t derail your long-term goals.

6 strategies for managing market volatility

DCAF - Time your investing - not the market

Dollar-cost averaging is an investment technique used to help reduce the risk of timing a single-sum investment. By investing a fixed dollar amount at regular intervals, the “dollar-cost averaging” process helps control the effect of market volatility by smoothing out the average cost per investment unit purchased. Over time, and in certain market conditions, it can result in a lower average price and a higher gain.

One historical time period when dollar-cost averaging may have worked was the market volatility we experienced in 2008. The below graph shows the difference in a hypothetical portfolio using dollar-cost averaging starting on September 1st, 2008, compared to a lump sum investment on that same date. While it’s important to note that dollar-cost averaging doesn’t always produce a higher-end return versus a lump sum, its systematic approach takes the emotional side out of investing and may help investors stay the course.

Staying the course in times of turmoil

Source: Scotia Global Asset Management and Morningstar. Based on an illustrative investment in the S&P/TSX Composite Total Return Index. It is not possible to invest directly in an index.
1 Dollar-Cost Averaging illustration assumes 12 contributions of $500/month made between January 1, 2020 and December 31, 2020, totalling $6,000 in contributions.
2 Lump Sum illustration assumes a one-time $6,000 contribution was made on January 1, 2020. The year 2020 was used for illustrative purposes as the benefits of dollar-cost averaging were prominently demonstrated.

Different asset classes and geographic regions perform differently through different market cycles. That’s why it’s important to avoid keeping your eggs in one basket, as the saying goes. By diversifying your portfolio, you can access the better performers while mitigating risk of being overly concentrated in those that lag.

Performance by Asset Class

Source: Morningstar. Priced in Canadian currency, as at December 31, 2023. Assumes reinvestment of all income and no transaction costs or taxes. Annual returns compounded monthly. The asset classes are represented by their indicated indices and the balanced portfolio is illustrative in nature and was rebalanced monthly. This information is for illustrative purposes only. It is not possible to invest directly in an index. Canadian Home Prices: Teranet-National Bank House Price Index Composite 11 index (C11). The calculation methodology for the Teranet-National House Price Index Composite has been adjusted effective December 19, 2023. Historical C11 index values have been recalculated to reflect this methodological change.

Performance by Country

Source: Morningstar. Annual total returns in Canadian currency as of December 31, 2022. Assumes reinvestment of all income and no transaction costs or taxes. Annual returns compounded monthly. The information is for illustrative purposes only. It is not possible to invest directly in an index.

Avoid letting your emotions guide your investing

Cycle of market emotions

Emotional investing is easy to fall into, but it can wreak havoc on any portfolio. Often, the best and worst times to invest are the very opposite of what our emotions tell us we should be doing.

Overcoming our fears to find growth
Historically, investors have had many reasons to worry about market volatility. Despite the short-term reasons for not investing, maintaining a long-term perspective can work to our advantage; over time, markets recover and grow.

Historical reasons for not investing vs. market growth

Source: Dynamic Funds and Morningstar Direct as of August 31, 2019.

Trying to time the ups and downs of the market can leave money sitting on the sidelines when it should be invested. This image shows the impact of missing the best 10, 20 and 30 days on a $10,000 investment in Canadian stocks over the past 10 years. As you can see, staying invested could have led to a better outcome for investors.

$10,000 investment from December 31, 2013 – December 31, 2023

Morningstar. For illustrative purposes only. S&P/TSX Composite Total Return Index, December 31, 2013 to December 31, 2023. It is not possible to invest directly in an index. Assumes reinvestment of all income and no transaction costs or taxes. Value of investment calculated using compounded daily returns. Missing 10, 20 and 30 best days, excludes the top respective return days.

Wealth accumulation: Investing with advice over the long term pays off

Academic research indicates that households that have a financial advisor save at twice the rate compared to those that don’t. What’s more, the same research has shown that over the long term, investors who work with an advisor accumulate almost three times more assets than those who don’t.

Financial advisors help people increase their wealth… and the longer people have advice, the more their investments grow.

Source: The Gamma Factor and the value of Financial Advice, Claude Montmarquette, Natalie Viennot-Briot, 2016

In periods of volatility, active management can pay off because portfolio managers have the ability to select holdings that have potential to:

1. Protect on the downside
2. Provide faster recovery when markets turn around

Why Active Management matters

This is important because it often takes a significantly higher return to recover from a loss suffered. For example, a 50% drop in price requires a 100% return just to get back to where you started.

Source: Dynamic Funds

At Dynamic Funds, we firmly believe that active management pays off. Our Portfolio Managers actively monitor markets and manage their portfolios with the ultimate goal of delivering long-term results.

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