As we move into another year, what’s your investment focus? Given the volatility of 2023, it can take discipline to stay focused on our objectives, but here are three perspectives:
While we often talk of average returns for indices like the S&P/ TSX Composite, annual returns often vary from the average. The visual shows the wide dispersion of annual returns of the S&P/TSX Composite Index since 1981: 83 percent of the time, annual returns did not fall within +/-2 percentage points of the long-term average return of 6.9 percent (red line). Almost 30 percent of the time, annual returns were negative. Investors should expect a wide range of outcomes each year.
Markets will experience both ups and downs, and recoveries can often take time. After the last bear market — the shortest in history at a mere 33 days during the pandemic — we may have been conditioned to believe that the markets should quickly rebound. However, a look back at S&P 500 bear markets over the past 50 years (chart top right) shows that it has taken an average of 26 months to recover to previous highs (from the trough, based on S&P 500 Total Return data). Consider that a 50 percent loss requires a 100 percent gain to recover. Down-market times are a normal part of the investing process and may be opportune times to build portfolios for the future. Eventually, the pendulum swings back.
The more you check your portfolio, the more volatile it will feel because of the greater likelihood of seeing negative performance. History has shown that by checking the markets daily, the chances of seeing a negative return are 46 percent. However, this reduces to 0 percent for 10-year rolling monthly returns. As the graph reminds us, taking a longer-term view smooths out the impact of shorter-term volatility. Extending an investing time horizon provides the opportunity to ride out market fluctuations and volatility and, by staying invested, investors are more likely to benefit from the market’s overall upward trajectory.
Any view or opinion expressed in this piece are solely those of the Representative and do not necessarily represent those of Harbourfront Wealth Management Inc. The information contained herein was obtained from sources believed to be reliable, however accuracy is not guaranteed. The information transmitted is intended to provide general guidance on matters of interest for the personal use of the viewer, who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law or factual situations of any individual or entity. Any asset classes featured in this piece are for illustration purposes only and should not be viewed as a solicitation to buy or sell. Past performance does not necessarily predict future performance, and each asset class has its own risks. As such, this content should not be used as a substitute for consultation with a professional tax or legal expert, or professional advisors. Prior to making any decision or taking any action, you should consult with a licensed professional advisor.