Investing versus trading: navigating the emotional rollercoaster of cyclical markets

Featuring An Nguyen, Vice President, Investment Services, listen to our latest podcast episode of Conversations on Wealth as we address why navigating the emotional roller coaster of investing is easier said than done.

We dive into why it’s so important to stay invested, what that looks like, and how an advisor can help work through these market cycles.

Sarah Widmeyer  0:16

Welcome to Conversations on Wealth, a podcast dedicated to helping Canadians navigate the complexities of wealth with a multi dimensional approach to planning and wealth management. I’m Sarah Widmeyer, Senior Vice President and Head of Wealth Strategies at Richardson Wealth. If you’ve been an investor over the past couple of years, you’ve certainly seen markets go up, and you’ve seen them come down. And while we know that markets are cyclical, and what has gone on now has gone on before and inevitably will return again, navigating the emotional roller coaster as an investor is easier said than done. An advisor that I know very well in the industry who’s been in a very long time said to me one time we’ve seen the movie more than once. We know how it ends, but we always cry in the middle.


An Nguyen  1:04

Why do we always cry in the middle…?


Sarah Widmeyer  1:05

We always cry in the middle. My guest today is going to share some strategies that we can use or avoid to help minimize the behavioral pitfalls that hurt investment performance, and ultimately disconnect us from longer term goals. I’m so pleased to have with me An Nguyen today. An is the Vice President–Investment Services here at Richardson Wealth. She and her team are a valuable resource for our firm’s advisor teams. They provide investment support and thought leadership through their research platform publications and analytical tools. An, I’m so pleased to have you here today.


An Nguyen  1:44

Thank you, Sarah. It’s great to be here with you today, and thanks for having me.


Sarah Widmeyer  1:49

My pleasure. So An, the question is “If we’ve seen the movie before, and we know how it ends, and we always cry in the middle. Why do our emotions get in our way? Why do we get in our own way when it comes to investing?


An Nguyen  2:06

That’s a fantastic start. And we know that when it comes to investing that investing is both an art and a science and the art part of investing is where all of our emotions reside. It’s no surprise, then we can feel a deep set of varying emotions when it comes to our money and how we invest it. So we know markets go up and down side to side and everything in between. When all of this is happening, our emotions can differ in a material way. What do I mean when I say that, so when markets are going up, how do you feel?


Sarah Widmeyer  2:44

Euphoric.


An Nguyen  2:45

You’re happy? You’re excited.


Sarah Widmeyer  2:47

Everything is good!


An Nguyen  2:48

Right. And as the market continues its ascent, you may almost feel euphoric.


Sarah Widmeyer  2:54

Right.


An Nguyen  2:55

And this is where at the very top of the market, the euphoria happens and it kicks in. That’s all fine and dandy, but we talked about, you know, the ups and downs, what happens on the other side of it? On the other side, the emotions we may come to feel. What happens when the market starts to dip? One of the very first common emotions we feel is we’re in denial, this can’t be happening. And as that progresses, how do we then feel? Anxiety creeps in. Fear creeps in. And as–as this progresses even further, we feel worse, and sometimes what can happen at the bottoms of the market is we can capitulate, and we can let our irrational thinking creep in and think this is never gonna end. But we know based on history, that that’s not true markets, absent flows goes up and down. So looking at some of the historical data in terms of fund flows, we know that investors can sometimes be their worst enemy. Going back to the global financial crisis in 2008, when there was multiple bank failures with Bear Stearns and Lehman Brothers, we looked at some US data in terms of fund flows, and we looked at the US data because it’s so plentiful. We know that investors panicked and pulled their money out of assets. Outflows actually happened month after month after month, even after the market began to recover. If we take a look at the S&P 500 it bottomed on March 9 2009. It subsequently Rose 63% to the end of that year 63% From March 9 to December 31 of the same year. The staggering part of all of this is that for some of this time, investors were actually withdrawing–taking their money out of their investments.


Sarah Widmeyer  4:52

Even as the markets were going up.


An Nguyen  4:53

They were fearful. All of those emotions crept in and the science of it was gone. So if you’re pulling out and not jumping back in, you would have missed out on some significant recoveries.


Sarah Widmeyer  5:05

So I think you’re getting to the next concept, which is and we’ve heard it before, and together, we are going to use an analogy of staying in the car, staying on the road and gripping that steering wheel. So you’re telling me then that we need to stay invested. Because if we don’t stay invested, we are going to miss out on the market climb. So that’s what I hear. But I know there’s more to it. So why is staying invested so very important?


An Nguyen  5:34

Sarah, when it comes to investing, time is on our side. As we have seen, despite market pullbacks stocks have risen over the longer term. Markets have endured time and time again, what has felt like insurmountable at least at the time, if you remember going through the crisis, crisis after crisis, markets have recovered. If you take a look at an investment mountain chart, and you take a look at a hypothetical growth of investment over a long investment horizon, in this case, look at 40 years, that would include Black Monday, the dot com bubble, the global financial crisis, and most recently, the COVID 19 induced recession. Through all of this, all of this markets, were able to recover. But if you were to at any point in any of these crises, taken a very shorter term view, you know, zoomed in on this mountain chart, all you would have seen was drawdown. However, as I shared when it comes to investing time is on your side. So instead of zooming in, let’s zoom out, take a longer term perspective, and what you will see is that equity markets have experienced tremendous growth, even with all these crazy shocks that have hit the markets. And if we go back in time, how did we feel during these times


Sarah Widmeyer  6:58

Terrible


An Nguyen  6:59

It felt bleak? Like is it going to end? Like the pandemic is as close as one. We–we just didn’t know what was gonna happen. There was so much uncertainty when it came to the market, we just wanted to take our money and hide it underneath the mattress. But we know now, looking back 2020 hindsight, we know that had that been our strategy, we would have missed out on tremendous gains. We’re talking about the global pandemic, the TSX, in that instance, had a double digit drawdown. But the period following the one year after the two year after had such significant growth to the tune of 44 and 73%, respectively.


Sarah Widmeyer  7:43

So what does staying invested really look like then? What does it look like?


An Nguyen  7:48

Well, I’m going to use a car analogy here just so we can get something visual going. In terms of driving a car, staying invested, I want you to be able to prepare for the roadblocks ahead, but still stay on the road. I want you to be able to anticipate and opportunistically shift, while remaining focused on getting to your destination in a safe way by staying on the road. I don’t want you to (be) veering off to the side from side to side, you may fall off a cliff, we don’t want that. We want you to stay on the road to get to your destination safely. So while it’s uncomfortable, volatility in the market can be viewed as an opportunity. Investment Managers in both equities and bonds use volatility to position their portfolios for the longer term. It’s an opportunity to rebalance portfolios and deploy capital in undervalued areas and harvest in areas where valuation potential has been reached. This is essentially what I’m describing as portfolio rebalancing. It’s a very disciplined way, buy low and sell high. If I’m going to go back to the car analogy, it allows you to stay on the road while making adjustments. We don’t want you running into any potholes.


Sarah Widmeyer  9:03

(Laughs in agreement) So then with all the information that we have access to as investors, why not just try to time the market and trade the portfolio? Cut your losses, go to cash, hide it under the mattress sleep? Well.


An Nguyen  9:20

Great question, Sarah, as simply put, the timing is really, really hard. I can’t emphasize this enough. Even if you ask the most experienced investment professionals, they will tell you how difficult it really is. They may get it right part of the time. But as I will share, getting it right part of the times means missing out on some very significant gains. As much as any investor would like to avoid the market downturns and take advantage of the rallies, to do this means getting out and getting it back in at the exact right time. But without a crystal ball, how many of us can really do this?


Sarah Widmeyer  9:57

Yeah, and I’ve heard it’s not just the getting out. It’s the getting back in


An Nguyen  10:00

The nerves… to get back in!


Sarah Widmeyer  10:02

You may be ab-you may be able to get out. But getting in is the hard part.


An Nguyen  10:06

It’s a contrarian perspective, it’s the antithesis of us running away from what we’re scared of. And getting back in, you know, that timing element of it, we know that no market cycle is the same. They vary in length, they vary in magnitude. So timing that perfect jumping in and coming back out at tops and bottoms, it’s hard for even the professionals. If I use an example, the record bull market that we saw between the low of March 9 2009, and ended with the onset of the pandemic, that was a record, how many investment professionals would have called for that, I remember at the time and going through it, so many people were saying, the bear market’s coming, the bear market it’s coming, not that it never came, but it came long after many people had guessed.


Sarah Widmeyer  10:58

So what are some of the tools that we can use as investors then, Ann that will help us stay invested and avoid the behavioral pitfalls of giving up when the market drops?


An Nguyen  11:10

Okay, so I’m going to try not to repeat myself, diversification, diversification and diversification, it is ultimately an extremely effective tool to help when markets are uncertain. Investing in different asset classes is a critical part of spreading out your risk budget. Keeping in mind, different asset classes perform well under different circumstances, which is why in a typical portfolio, you’re going to have many types of different investments that vary by style, geography, public versus private, and the list can go on. If you can imagine an investment quilt chart where all of these investments are lined up, and performance is color coded, and top performers are one color and bottom performers are another color, you can see that over time, year after year after year, the colours are changing, and leadership is changing. So it means that holding a mix of these investments because we know they perform differently under very different economic scenarios. Holding a mix of these investments can therefore help smooth out your return stream and minimize portfolio volatility.


Sarah Widmeyer  12:37

I also want to talk about the importance of a financial plan because I’m going to come back to your analogy of the car. I’m in the car, I’m gripping the steering wheel, I’ve avoided the pitfalls, I’ve made little course adjustments. But I’m still driving to point B, we want you to get there. And so having a clear financial plan is clearly because a financial plan gets you from point A to point B is clearly an important tool to helping you stay on the road. Also a written investment policy statement. Can you talk a little bit about these strategies and how they help us stay on track?


An Nguyen  13:15

Definitely I–what I think the investment policy statement essentially does is when I answered your first question about the art and science, it brings those two together in a very disciplined way. So what we’ve talked about today and able to successfully execute and my view is you have to have a disciplined process and very clear financial objectives, A written investment policy statement, or we call them IPS’s can help bring all of this together. It will include things such as the scope and purpose of your investments, the governance structure, risk return objectives, amongst other things. Working with an investment professional, such as an investment advisor can help you craft (an) investment policy statement. The investment advisor will ask you the critical questions that will help to form the basis of which your assets will be invested. And of course, to ensure the IPS is accurate, you want to make sure that you’re reviewing it periodically, you’re talking to your advisors should something change in your life that would require a change in your investment portfolio. There is an ongoing dialogue that has to definitely happen with your investment advisor. In all, in my view, I think working with an advisor will help you avoid the temptation to unnecessarily trade since it may be contrary to your policy, and of course, it will help you stay focused on your longer term financial goals.


Sarah Widmeyer  14:37

Okay, well, thank you. I’d like to thank An Nguyen for joining us today and sharing her expertise on navigating market volatility.


An Nguyen  14:45

Thanks for having me, Sarah.


Sarah Widmeyer  14:47

Our pleasure. Market declines can be unnerving. In fact, they can be downright terrifying. And it’s difficult to see your investments go up in value one day and down the next. But as we we’ve learned today in speaking with An the best course of action is to be prepared and stay invested, stay in that car and stay on that road, as hard as it is sometimes, and focus on strategies to help manage volatility and risk. And of course, we’re always here to help guide you through these tricky times, and help you stay focused on your long term goals and your overall financial plan. Conversations on wealth is available wherever you get your podcasts. Remember to follow us on LinkedIn, Twitter or Facebook for the latest on wealth strategies. Thank you all for listening. And join me again next time.

Related articles

Podcast

Managing a financial windfall

Receiving a windfall can come in many forms, a lottery win, an inheritance, business sale, or a real estate sale. In this episode of Conversations…

1 minute read

Podcast

When should you review your will?

Many of us think of a will as a one-and-done thing, but it’s really not. In our latest episode of Conversations on Wealth, Sarah Widmeyer,…

1 minute read

Podcast

Centres of Influence Referrals

Listen to our latest episode of Conversations on Wealth about strategies to generate Centres of Influence referrals (COIs); a goldmine to help advisors build their…

1 minute read