Building investments to withstand volatility

Mutual funds can help in an uncertain economy

The economy has its ups and downs; markets will rise and fall with it. Recessions, innovations, politics, pandemics – recent history has shown us that very clearly. When markets are volatile, some investors avoid equity funds while they wait for the "perfect" time to invest. That can be a mistake.

Successful investing doesn't depend on timing the market. Even financial experts can't accurately predict what the markets will do on a daily, weekly, or monthly basis.

Opportunities are available at every stage of the economic and market cycles. One way to pursue those opportunities is to look for mutual fund options that can provide solid performance and superior long-term growth potential.ᶲ

Seek out quality funds

Start by doing your research. Identify specific assets, industries, or geographic regions that you believe offer the best value and opportunities. Then, choose funds that concentrate on those areas.

Another way to strengthen your portfolio is by selecting fund managers with a good track record and reputation. Look for those whose management style and investment objectives match your own.

Asset mix also has a major impact on performance and overall portfolio volatility. Review your mix of equity and fixed income funds to ensure that it is in keeping with your accumulation goals and risk tolerance.

Fundamental truths about investing

Regardless of the economic conditions, it's important to remember some key points regarding investing in any economy:

1. Markets provide superior performance, but the downside is volatility

Historically, stocks of large North American companies have outperformed the bonds of those same companies by a margin of roughly 1.75 to 1. But with that superior performance comes volatility.

As a general rule, stock markets make money roughly three out of four years. That means, of course, they lose money that fourth year. The markets generally do well enough 75% of the time to offset the 25% sub-par performance. And remember: if stocks did not come with any risks, they would not provide a superior return either.

2. Short-term instability cannot be avoided

We would all love to perfectly time the ups and downs of the market. Unfortunately, that's simply not possible. Investing always entails a combination of pain and gain – the only question is when they occur and does the gain eventually outweigh the pain.

When periods occur like the recession of 2008, the pain of investing is immediate and the gain is in the future. If you avoid the markets altogether, the peace of mind you gain is immediate, but the pain comes in the form of lost opportunity and potential compromises in your retirement lifestyle down the road.

In uncertain times, sitting on the sidelines can be a tempting option if you truly can't live with the volatility. However, history shows that when stocks recover from a significant drop, they tend to do so very quickly. Being out of the market can mean missing a rise of 25% or more.

3. Volatility decreases the longer you invest

The good news about volatility and risk is the longer your time horizon, the less of an issue they are. Looked at over periods of five or ten years, the variations in returns are reduced to a fairly modest level.

For investors who need to cash in their investments in the very near term, these markets do indeed pose more of a problem. But based on historical experience, for investors with a time horizon of ten years or more, volatility decreases to the point that it's almost a non-issue.

4. Investing based on emotional reactions can be devastating

If your portfolio is well balanced and relatively conservative, you will generally be somewhat insulated from the effects of a crash. Emotional reactions can, however, be fatal to a well-balanced portfolio.

Investors themselves can fluctuate between fear and greed, depending on market conditions. But making reactive decisions can destroy the value of a portfolio. Your investment professional should act as your emotional anchor, preventing you from making rash decisions.

5. The right managers will prove their worth over time

Your investment professional should help you select money managers based on their strong investment convictions and discipline, consistent performance over the long run, and a track record of containing losses in downturns. Although you may be concerned if your advisor recommends standing pat in the face of turbulent markets, it's important to understand that while no changes are being made to the funds you hold, beneath the surface your portfolio is being modified as these managers realign the stocks they hold to capitalize on opportunities.

Systematic investing helps manage risk

Making regular automatic contributions to your portfolio can help smooth volatility over the long term. It simply means you buy more fund units when prices are low and fewer when prices are high. Staying invested means that your money keeps working towards your goals through all the highs and lows.

Connect with a BlueShore Financial investment advisor to discuss your plan today.