The Value of Advice in Volatile Times

Investment markets are unpredictable. Consider the past few years in which markets have faced turbulence from wars, a global pandemic, corporate bankruptcies, and surging inflation. It is important to remember that volatility is a normal part of investing.

Market timing and performance chasing has never been an effective way to achieve the most financial progress for investors and their families. The beauty of investment management, however, is that many types of advice and strategies can be measured or explained to help clients understand how they specifically benefit from their relationship with their advisor and their firm’s investment and administrative teams.

Active Rebalancing Philosophy & Behavioral Guidance¹

With regular rebalancing, a client’s portfolio will more likely retain its original asset allocation, keeping the investor within their risk comfort zone while remaining appropriate for an investor’s stated goals. Higher-risk portfolios tend to experience greater volatility, which can lead to investors to make impulsive decisions driven by their emotions.

For example, 2020 was a wild ride. Many investors ran for the exit in mid-March 2020, when the S&P/TSX Composite Index registered the largest weekly decline since 2008. In fact, $14.1 billion was pulled out of long-term funds in Canada in that month.² In 2022, we saw similar reactions as stock and bond markets declined.

Many investors will experience a cycle of investing emotions, detailed later in the document. During periods of extreme volatility, emotions driven by “loss aversion” – the desire to avoid additional losses because losses feel more painful than gains feel good, tempt investors to sell out of the market after a significant drawdown. They plan to re-enter the market when the outlook is more promising, but it is difficult to time the market. Additionally, the best days often follow the worst, and it is important to be invested for those good days for the recovery of one’s portfolio. The chart below illustrates the difference between an untouched $10,000 investment in the S&P 500 from March 31, 2003 to December 31, 2024 to a return that is impacted by missing some of the best days as a result of premature selling.

Returns of the S&P 500³

Equity Performance in the Long Run³

Market fluctuations are normal. Market indexes see gains and losses every day. The accumulation of 0% and 1% days explain much of the positive S&P 500 annualized total return from March 31, 2003 to December 31, 2024.

Market Timing in the Long Run⁴

Consider an investor blessed with the power of perfect market timing (dark blue line) compared to another investor cursed with systematically picking the worst possible day to invest each year (red line). In the end, the difference is a little less than 1%, and when considering an investor saving systematically at the beginning of each month, the annual outperformance shrinks below 0.5%.

Cycle of Investing Emotions⁵