Michel Villa | Collaborator
French duo Gabriella Papadakis and Guillaume Cizeron were the favourites to win the ice-dance competition in the recent PyeongChang Winter Olympics. Unfortunately, in the first few seconds of the short program, Papadakis's top came undone, exposing her to millions of viewers! Despite the wardrobe malfunction, the athletes did well and set a new world record in the long program, winning them the silver medal. For me, this is a great example of the importance of staying focused, regardless of the circumstances.
This principle definitely applies to the stock market as well. Even though the markets have a long-term bullish bias, investors must inevitably deal with periods of increased volatility caused by unpredictable events like terrorist attacks, Brexit or fears of a possible trade war. Just like Papadakis and Cizeron, you have to stay disciplined and patient.
Here are 3 tips to help you do that.
Tip 1: Be willing to accept volatility
Between 1980 and 2017, the average annualized return of the S&P 500 market index was +10.3%. However, on average, the difference between the highest and lowest level of the S&P 500 in a single year was 13.8%. And since 1965, the S&P/TSX, the primary gauge of the Canadian stock market, has dropped by at least 25% seven times. Investors must accept the fact that downturns are normal and frequent.
Tip 2: Diversify your portfolio
It's critical to manage risk by diversifying, distributing your investments among different stocks, sectors, asset classes and management styles. That way, you'll be better equipped to deal with periods of significant stock market fluctuations. Not many people stick to this principle, though: Based on an analysis of the stock market activity in 40,000 discount brokerage accounts, the average number of stocks in a portfolio is 4! Ideally, you want to have 15 to 20 stocks with different return/risk profiles in your portfolio to get the benefits of diversification.
Tip 3: Consider a regular investment plan
You've no doubt seen that predicting which way the markets will go in the short term is pointless. It's better to automatically invest the same amount of money on a regular basis; you'll reduce the temptation to "outsmart" the markets by actively trading or by staying on the sidelines, which will improve your stock market performance.
All investors have a realistic shot at winning the stock-market game. But, just like Gabriella Papadakis, they need to focus on their goal, or else increase their exposure to disappointing long-term returns.
CI Investments. Five strategies for dealing with difficult markets, August 2015.
J.P. Morgan Asset Management. Guide to the Markets, Market Insights, January 2018.
Statman, Meir. Finance for Normal People: How Investors and Markets Behave. Oxford University Press, 2017.