July 28, 2022
Staying the Course - a Message from Spire Advisors of Assante Capital Management Ltd.
The following is an analogy shared with us by one of the members of the EdgePoint investment team concerning volatile markets. We believe it serves as a great reminder to the many of us that are feeling tossed around by the market during this time, that the best course of action is to stay the course.
EARNING OUR WINGS
- By Frank Mullen
A friend of mine is a pilot and he once laughed at a common description of his job: “hours and hours of boredom punctuated by moments of sheer terror.” A pilot’s success can be determined by their reaction to those brief moments, regardless of how long they have successfully flown without prior mishaps. In Morgan Housel’s great book, The Psychology of Money, he likens an investor’s success to that of a pilot. An investor’s reaction during periods of so-called terror will likely drive their long-term performance and ability to compound their capital.
Does the terror of declining asset values cause you to sell and wait for clearer skies, or does it prompt you to reevaluate your thesis and take advantage of the now-discounted prices? Both are understandable responses, but far too often the average investor sells and locks in a loss before truly evaluating the investment’s future prospects. I have witnessed this countless times over the years. The natural human reaction to fear overwhelms one’s ability to reason, and it can lead to undesirable consequences.
To further add to Frank Mullens commentary, the following graphs illustrate the importance of staying the course. As you can attest from graph 1, it clearly depicts how U.S. stocks performed after the inflation peaks of December 1974 and March 1980. In both instances, markets staged sound returns over the following 1, 3, 5, and 10-year periods.
U.S. stocks rebounded following peak inflation in the ’70s and ’80s
GRAPH 1
Source: Bureau of Labor Statistics. The S&P 500 Index is a market-capitalization-weighted index of the 500 largest domestic U.S. stocks. Indices cannot be purchased directly by investors. Past performance does not guarantee future results.
History has shown that after previous bear markets, Canadian equities recovered and resumed their upward trend. This was also seen in 2020-21 with the COVID-19 pandemic, where broad North American markets such as the S&P/TSX Composite Index and S&P 500 initially declined, but then recovered and went on to reach all-time highs. That’s why it’s important to remain focused on your long-term investment objectives. Investors who sell during bear markets may miss out on significant returns during recovery periods and bull markets.
Market recoveries following bear markets, December 1990 to December 2021
GRAPH 2
Source: TD Asset Management
We understand that it is simple for us to say, “look at these graphs and it will all make sense”. This may be easier said than done when markets have declined by as much as 10-20% in a relatively short amount of time. However, we cannot stress enough the importance of “the big picture”; time is our friend in markets such as these and by reverting to the data we can be confident in saying that the markets will recover with time.
- Spire Advisors of Assante Capital Management Ltd.
Disclosure:
The information in this letter is derived from various sources, including CI Global Asset Management, Invesco, TD Asset Management, EdgePoint Wealth Management. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources and reasonable steps have been taken to ensure their accuracy. Market conditions may change which may impact the information contained in this document. Past performance does not guarantee future results. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.