Unused to volatility, young investors may dread a downturn. Here’s how to prepare

Between rising inflation and geopolitical events, there’s been uncertainty in the future of the markets.

Between rising inflation and geopolitical events, there’s been uncertainty in the future of the markets.

“It’s one of these times where you just feel like anything could happen … A lot of people have some anxiety about what’s to come in the short term or the near term,” said Robb Engen, a fee-only financial planner at Boomer and Echo in Lethbridge, AB.

“It really is a different time than let’s say the March 2020 crash, which was almost over in an instant before things started roaring back again,” he said.

While experts agree that no one can predict an impending market crash, there are some strategies that young people — who may not have experienced a crash before — can use to make sure they’re in a good position if a crash were to occur.

Investors who have been in the market for a while have been through the 2015 oil crash, the 2008 financial crisis, possibly even further back to the tech bubble collapse in 2000 and have experienced market crashes before, said Andrew Dobson, financial planner at Objective Financial Partners Inc. in Toronto.

If those people learned to stay in their investments at those points in time, another downturn isn’t going to affect their behaviour and they’ll stick with it. “They’ve built an immunity,” Dobson said.

“I think the people that will have trouble with this are newer investors that purchased investments either just prior to the pandemic — where we saw a significant amount of volatility— or just after on the way up.“ Dobson said these people might not have seen their investment grow much during that time.

For example, if someone bought at a high or is in a negative position, they may be getting a bad impression of the stock market and question whether they’re on the right track, he said, especially if a crash were to happen.

Engen said investors should reflect on how they felt and reacted during crash at the pandemic’s onset in March 2020 and consider how that might set a precedent for how they’d respond to a prolonged downturn.

“Were you eagerly investing and adding to your portfolio at that point or were you panicking and wanting to pull money out?” he said.

Engen’s advice for investors is “control what you can control,” which is your savings and spending, and to invest in a low-cost, globally diversified and risk-appropriate portfolio you are willing to stick to in good times and in bad.

“We’re bombarded with messaging around the daily movements of the markets which tries to nudge us into doing something. We feel like we should be navigating around downturns or moving out of sectors that are underperforming and into a better performing sector. But we don’t have control over that,” Engen said.

“There’s so much evidence that we are not good at timing the market or picking winners and losers. If we are led by our emotions in investing, we’re going to chase past winners and sell losers. We should be doing the opposite.”

Instead, Engen’s philosophy is that investors should find an investing solution that works for them regardless of current market conditions.

For example, Engen noted that in the last few years, investors have been gravitating toward U.S. stocks, while he was invested in a 100% global stock portfolio using Vanguard’s VEQT All-Equity ETF. Someone might look at that and wonder why he didn’t just invest 100% in the S&P 500 because he would have had better returns than with the globally diversified portfolio. “That’s true, but I didn’t have a crystal ball to know that outcome in advance,” he said.

Investors who saw how well the S&P 500 was performing over the last several years might put all of their money in U.S. stocks, expecting that they’re going to outperform other investments, he said.

“Some investors might take that even further, thinking it’s actually just the big tech stocks like Apple, Amazon and Facebook that are driving all those returns so they’re going to just invest in technology stocks individually or through the NASDAQ 100.”

And, some investors might take an even smaller subsection of the U.S. market, focusing on technological disruptors like electric vehicles or robotics — and only invest in those companies, he explained.

“But the more concentrated your portfolio is, the wider the range of outcomes you’ll get from those returns. This is why globally diversifying is a good idea — you get a narrower dispersion of returns and a more reliable long-term outcome.”

The challenge, he said, is that investors want all of the upside in a good market and none of the downside in a bad market, which can cause investors to overestimate their risk tolerance in bull markets then panic when their investments fall in value.

“Like a good negotiation where both parties give up something, perhaps the sweet spot for investors is an asset allocation that leaves you wanting a bit more upside in good times and a bit less downside in bad times.”

And when it comes to young investors, Engen said that he hears they’re looking forward to a market decline so they can take advantage of some of the lower prices, especially because markets have gone up almost uninterrupted since 2009.

“If you’re got a stable job and you’ve the cash flow to be saving, young investors should be cheering for a downturn in the markets because that’ll allow them to buy more shares at better prices and they’ll have higher expected returns on those shares.”

This report by The Canadian Press was first published April 12, 2022.


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