Don’t give in to the red lights

Photo by Eduardo Munoz Alvarez, The Associated Press

Monday was active again across all stock markets in the world and was heavily tinged with red.

Jean-Philippe Decari

Jean-Philippe Decari
Journalism

Over the past three months, it has certainly not been a comfort to consult the ratings of major stock indexes directly. Because it is the red color that characterizes, for the most part, the daily behavior of indices and the movement seems to be only accelerating, as evidenced by the S&P 500 which has entered into a correction by accumulating devaluations of more than 20% since the beginning of the year.

Posted at 6:30 a.m.

Monday was lively again in all the stock markets of the world, and above all heavily tinged with red, bleeding red, as if the latest statistics on US inflation had sounded the alarm and raised a global awareness that the situation was still a long way off. out of control, and may even get worse.

Little consolation, despite Monday’s sharp 2.6% drop by S&P/TSX, Canada’s stock market has yet to suffer a currency devaluation like that recorded by US or European stock markets since the start of the year.

We may not have entered a bear market, but the Canadian market is now officially in a correction, having lost more than 10% of its value since it peaked at the beginning of the year. . It also smells a bit depressing in the house.

In such circumstances, it is worth remembering that market corrections, regardless of their ferocity and duration, are part of the stock market investment life cycles. When the markets start to move backwards and give no sign of wanting to change direction soon, we automatically have a reaction to wanting to get out of this infernal and troubling spiral at any cost.

However, history teaches us that a wait-and-see attitude is always more profitable in the medium and long term, as the many episodes of stock market corrections over the past 75 years have shown us.

Reuters financial news reported on Monday that from 1946 to today, the S&P 500 index has gone through 13 bear markets and recorded average losses of 32.7%, including a brutal 57% drop during the 2007-2009 financial crisis.

On average, the index reaches its lowest level one year after it was officially declared bearish (after accumulating a 20% loss). Historically, the index takes two years to recover the peak from which it started.

The last bear market in the S&P 500 lasted only one month between February and March 2020 when the pandemic hit while the longest bear market would last 69 months from bottoming to back to top, when the market was bearish from 2000 to 2003.

Synchronization risk

Many investors still have the reaction of wanting to sell their positions or even their stock funds as soon as their portfolio registers a valuation loss that is too large in their eyes.

The idea is to save what’s left rather than continue living the agony of helplessly watching one’s savings decline. Many plan to quickly return to the market when it resumes its upward trend.

Good risk, but not very profitable. Seeking to take advantage of the so-called price effect, by selling when the market is down and buying back when the market is up, is actually the opposite approach to what an investor is supposed to take.

You have to buy when prices are low and sell when they are high. Market volatility and risk cannot be combated. When the market goes down, we wait and buy back at a low price to resell the securities when their value goes up,” reminded me Neil Cunningham, CEO of PSP Investments, which manages $230 billion in assets for the company’s Federal Employee Pension Plans.

The idea is to set medium and long-term goals to achieve 5-year and 10-year returns that take into account the volatility of the stock markets.

No one likes to see red lights come on, and no one likes to read their investment statements to see the gaps that suddenly appear in their life savings. But those who know and are able to tolerate these cyclical episodes will realize after five years that it is worth being patient and not giving in to the backlash of selling everything.



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