Market volatility and investment expectations

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There is both good news and bad news when it comes to investments. Sometimes stock values increase and sometimes they decrease.

To start, let’s consider the reality of investing. The expected returns on stocks are far higher than bonds.

If you are a long-term investor and your sole objective is a high return, then stocks are a good choice. But stocks have a downside.

Stock values can fluctuate. And lately, the fluctuations have been dramatic.

Values can change significantly day to day, and even within a single trading day values can be extremely volatile.

If you own stocks you own volatility. And that is where a significant error in human behaviour comes into play.

Individual investors have a pattern of buying stocks for the long term then panicking and selling during normal periods of decline.

The problem with this pattern is that it leads to expectations and expectations often determine what we believe to be real.

Many recent declines in the value of stocks have been followed by a fairly quick recovery. That kind of market activity can train investors to expect a fairly quick recovery. We have no issue with a decline as long as it is followed by a fast recovery.

Unfortunately, that is not always going to be the case. Just by expecting something to happen will not actually make it happen. As the saying goes, expectations can be a happiness killer.

If you own stocks directly, or indirectly through mutual funds, I urge you to have realistic expectations. The harsh reality is that stocks can decline in value and their recovery may take a long time.

Do not be misled by some past examples of a quick recovery.

The reality is that your stocks could decline significantly. Patience will be required to allow time for values to recover.

 

 

Peter Watson is an agent of, and securities products are provided by, Aligned Capital Partners Inc. (ACPI).  ACPI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF).  The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments