How market volatility can work for the investor

What is market volatility? Volatility is when prices of stocks and equity funds increasingly shift in value up or down. When a low-volatility period is followed by increases in volatility, stock markets may begin to offer lower prices, which can effectually present lower priced fund units, both offering a buying opportunity for the investor.

The stock market can both gain value in a “bull market” and can have periods of slow down referred to as a “correction” or if more prolonged, a “bear market”.

Many investors have seen their investments increase dramatically since the 2008-9 financial crisis that affected all the world’s markets. Further, since 2020 during the pandemic, the market has experienced remarkable gains as investors moved into another big opportunity after an extreme correction based on fear in mid-March 2021 occurred. Many of these investors have also witnessed a remarkable bull market taking many stocks and equity funds much higher than their previous years’ valuation. Conversely, investors who unwisely sold their holdings out of fear lost money.

The ideal strategy exercised by most successful contrarian investors like Warren Buffet is to buy investments when others are fearful, and they are selling their holdings at lowering prices.

When buying opportunities abound The market can experience increased volatility due to fears such as various wars, debt crises of countries, economic slow-downs, or the potential of rising interest rates.

Nevertheless, during periods of higher volatility, wise investors think positively, relying on the professionals managing their investment portfolios.

Predesigned investment plans are important Though periods of volatility occur, it is important to exercise patience while maintaining a balanced and well-diversified portfolio according to a prescribed investment plan.

Plan with your advisor to establish a buying plan when others may be fearful. Market cycles of volatility are normal and expected.

 

Market Indices

The links on this page of the financial market indices for your perusal is information provided as is and solely for informational purposes, not for trading purposes or advice and may be delayed.

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Indices & Data Links

    • Latest TSX numbers, market commentary, other North American stock markets; please click here
    • Latest Canadian dollar exchange rates (USD, EUR, GBP): please click here

Source: Google Finance | OANDA Currency Tools

Invest by paying yourself first

Some people never pay themselves first.

After most people have paid for their necessities, there seems to be little left over for investing.

Determine your perspective on investing. Always spending and never investing is a serious dilemma often based on a certain mindset that can easily change for the better.  Do you view yourself as a consumer or an investor?

If you see yourself as a “consumer”, you may experience that there is never enough paycheck left at the end of the month for investing. However, is this caused by a lack of income or your own spending patterns? The first barrier to investing is a “perceived lack” of investment capital, often not reflecting reality. Unfortunately, what we think often becomes our reality.

Investors have personal discipline Conversely, “Investors” take an honest mathematical look at their expenses, separating discretionary income from what one needs to live on, knowing that impulsive buying decisions, even to purchase many small things on sale can add up.

This disciplined viewpoint allows them to have money to invest. Once paid, the first “consumption” decision can be to purchase an investment suitable to their goals and objectives.  The rest of their paycheck is then spent with no worries on required consumption for the rest of the month.

Investors get good advice, and then act. Many people are impatient or confused when it comes to the science of investing.  True “Investors” all have a key characteristic that makes for success — taking the right action with professional advisory assistance.  They also understand that without experience and knowledge, investments decisions can be made in haste, and potentially destroy an otherwise good investment plan.

Can I mitigate risk in a diversified equity fund portfolio?

What is Diversification?

Diversification is a strategy by which you create a portfolio that includes several investments. You make investments over more stocks of different companies or securities, such as bonds or mortgages, with the objective of reducing risk.


Because of their higher risk, equity funds have historically offered the most promising growth over the long term, as compared with other funds that focus on assets such as bonds and cash. In markets that are volatile, how can we reduce the overall equity volatility over the long haul without losing the potential for gains?

In a volatile market, if you shift the asset class out of equities into bonds and/or cash prior to resurgence in the overall market, you can lose by trying to automatically time the market. Why is this? Most stocks increase in value through a new bull market period which can begin quickly over several days. By being out of the equity market (in this case at the wrong time), you could lose the gains you might have achieved by being more heavily invested in equity funds.

Understand geographic diversification.

Global equity markets are more closely correlated than they were five or ten years ago, reacting to world events in a more similar fashion. Technology has connected our world to make it a smaller place, so what happens today in China’s market can impact economies everywhere.  And more importantly, global diversification offers scant protection from market crashes when correlations become indistinguishable, such as during the financial crisis of 2008–2009.

However, it is still prudent to have portfolios that offer geographic diversity, rather than focusing exclusively on a single geographic equity market.

What are the most common mistakes of fund investing

Here are several common mistakes that investors can make:

  • No clear investment goals. Determine what you want from your mutual fund portfolio. This will help you choose the right investments to realistically meet your future expectations.
  • Trying to time the market. Don’t get caught timing the market – when influenced by either of the two emotions – greed or fear. Greed compels people to buy when the stock market (and a fund’s unit value) is high. Conversely fear causes many to sell when the stock market’s value (and a fund’s unit value) is low. Make regular investments to benefit from dollar cost averaging (DCA) to level out the peaks and valleys of the market. It is time in the market, not timing, that counts.
  • Not selecting investments with a long-term track record. Don’t just look at a mutual fund’s most recent performance. For a long-term investment, it is important to check out performance over one, three, five and ten year periods.
  • Shopping for a specific mutual fund, not a family of funds. The fund you select today may not be the best one for tomorrow. By choosing a reputable family of funds, you ensure that you can switch in the future with minimal cost. A family of funds also allows you to move into a money market fund if the market is reacting in a state of fearful unrest such as prior to the debt crisis and the current continuation of the debt crisis in the Euro nations. Note: Fear is measured by a special volatility index called the VIX, which when above 40 can precipitate market sell-offs which can also affect a fund’s performance. It takes great skill to navigate the market (and fund investing) at these times.
  • Investing too conservatively. Even if you are in your 50s, you still have about 30 years of investing time ahead. Look at investing some of your money for growth by using equity funds while keeping some in bond funds and dividend funds, and/or balanced funds.
  • Not seeking financial advice. Making investment decisions can be confusing and intimidating. Unless you have exceptional knowledge of the market, your portfolio could be healthier with the help of a qualified financial advisor.

8 Amazing Advantages of Mutual Funds

Mutual funds offer investors a superior means of accumulating wealth through a broad range of investment solutions based on professional investment principles in a regulated environment.

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There are eight benefits of Mutual Funds which the investor appreciates:

  1. Professional portfolio management
  2. Manage risk through diversification
  3. Opportunities for foreign and domestic investment
  4. Oversight by professional managers
  5. Low entry investment amount
  6. Solutions meet a wide range of needs
  7. Easy to buy and sell
  8. Convenient administration

The rapid growth in the investor confidence of using mutual funds escalated to over a half trillion dollars. This indicates the validity of using mutual funds in an investment portfolio.

Source IFIC

How do I diversify my portfolio?

shutterstock_15283585By diversifying among carefully selected, different asset classes, you reduce the risk of being over-exposed to any particular asset class.

For example, an investor may hold assets such as bonds, GICs, balanced funds, equity funds, foreign equities, etc.   The adage of “not putting all your eggs in one basket” applies to a diversified portfolio of assets.  Having 10 different equity funds in a portfolio does not mean that an investor’s portfolio is diversified.

What are the main benefits of investing in mutual funds?

What are the main benefits of investing in mutual funds?

The average investor, who buys stocks and bonds, does not have the necessary time to assess securities, nor the expertise to make qualified investment decisions. Mutual funds allow the investor to effectively hire a fund manager to make these decisions. Managers possess training in market analysis and have an understanding of economics. They work to assess the value of a company’s stock and develop an investment strategy that establishes buy and sell criteria, based on an educated, tactical discipline.

Some of the main benefits include:

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Instant Diversification. Many have heard the phrase, “don’t put all of your eggs in one basket.” In a mutual fund, investor monies are spread across a variety of different securities investments. By investing in mutual funds, as opposed to individual securities, the account growth or loss is based upon a group of different investments, rather than the performance of a single security.

Professional management. By investing in mutual funds, the investor is not involved in the evaluation and maintenance of the underlying portfolio investments. Instead, the day-to-day decisions of each fund are handled by experienced, professional money managers.

Lower fees and expenses. Mutual funds provide economies of scale. Because mutual funds pool the resources of many investors, the fees per share passed on to each individual investor from purchasing the underlying securities in a mutual fund are often less than if they would purchase the same individual securities on their own.

Convenience. Dividends and capital gains can be used to purchase additional shares, facilitating growth to an investor’s portfolio.

Automatic Investment Planning. Commonly, investors are able to set up a dollar cost averaging plan with their bank or brokerage account to invest a set amount each month into the mutual fund of their choice.

Thousands of mutual funds to choose from. Every type of investment fund—including equity funds, bond funds, diversified funds, balanced funds, and international funds—give you access to investments in the world’s strongest companies.

You can also invest among foreign securities. Although Canada has a strong economy and is a G5 nation, it represents approximately 3% of the capitalization trading in non-domestic markets. The U.S. offers access to the highest capitalization in the world, while tremendous investment opportunity lies outside of North America—accessible via mutual funds.

Financial Consultation. Your financial advisor can help you design your mutual fund portfolio and review it with you on a regular basis. Most advisors offer the majority of the better-performing funds—with both foreign and Canadian securities included, including a wide range of international and global funds.