We’re nearly halfway through 2022 and the year has not been kind to investors, to say the least. Global stock markets are suffering their worst prolonged losses in recent memory. The S&P 500 is down about 18.5%, international stocks are down about 17%, and emerging market stocks are down about 15%. Domestic stocks have fared better, but the broad Canadian market is still down about 4% this year.

Meanwhile, bonds have not been a safe haven as rising interest rates pushed bond prices down. A broad Canadian bond index is down almost 13% this year, while short-term bonds are also down about 5.5%.

What’s an investor to do?

For starters, stop checking your portfolio so often. Investors who focus too much on short-term performance tend to react too negatively to recent losses, at the expense of long-term benefits. This phenomenon is known as myopic loss aversion:

“A large-scale field experiment has shown that individuals who receive information about investment performance too frequently tend to underinvest in riskier assets, losing out on the potential for better long-term gains (Larson et al., 2016).”

Loss aversion is a cognitive bias – the idea that a loss is psychologically more painful than the pleasure of an equivalent gain.

Think of the your portfolio returns over the past three years (2019-2021). It felt good to see your investments increase by double-digits. Here are the returns for Vanguard’s Balanced ETF (VBAL) during that time:

• 2019 – 14.91%
• 2020 – 10.24%
• 2021 – 10.27%

Fast forward to 2022 and VBAL is down 10% on the year. Loss aversion tells us the pain of these losses is felt twice as powerfully as the pleasure of the previous years’ gains.

With myopic loss aversion, we focus too narrowly on specific investments without taking into account the bigger picture. You’ve experienced this if you’ve ever checked your portfolio a short-time after a recent purchase and cursed your luck if the investment is down.

Professor John List was a recent guest on the Rational Reminder podcast and he co-authored a paper on myopic loss aversion. The paper found that, “professional traders who receive infrequent price information invest 33% more in risky assets, yielding profits that are 53% higher, compared to traders who receive frequent price information.”

When asked how often investors should check their portfolio, List said, “as rarely as possible”:

“I would say once every three, six months is fine. But the reason why I don’t want you to look at your portfolio is, because when you do and you see losses, even though they’re paper losses. You say, “My gosh, that hurts.” And you’re more likely to move your portfolio out of risky assets and into less risky assets. And as we all know, just look at the data. The data over long periods of time, that’s the equity premium puzzle, is that you get much higher returns, if you’re willing to bear some of that risk. Now, if you look at your account a lot and you have myopic loss of version, you’ll be much less likely to bear that risk. So, you’ll move out and you’ll be in inferior investments.”

This applies to both novice and experience investors. I coach clients regularly on the benefits of sticking to their investment strategy and ignoring short-term market fluctuations. But it’s hard when the daily news headlines are screaming in your face about how bad the market is doing and why it’s only going to get worse.

My worst moment was during the March 2020 crash. I had just quit my job three months before, and my investments were down 34% in a short period of time. It was a rough time when even I was questioning what to do. It didn’t help that I had no RRSP or TFSA contribution room – so I couldn’t even “buy the dip” to make myself feel better.

Related: Exactly How I Invest My Own Money

What did I do? I stopped checking my portfolio. I had no reason to log-in anyway, since I wasn’t making regular contributions. I reminded myself that my investments were long-term in nature, and that markets go up most of the time. Periodic declines are the price of admission for risky assets like stocks.

For investors in the accumulation stage, I’d argue this market decline is a blessing in that the contributions you make today have a higher expected return than contributions you made 6-12 months ago. Take advantage of this opportunity to pick up more shares at today’s depressed prices.

For investors closing in on retirement, now is the time to prepare your retirement income plan, which should include having 1-3 years’ worth of spending in safe assets like cash (high interest savings) or short-term GICs. Give yourself a safe cash buffer so you don’t need to sell investments at a loss. You can even build this cash buffer with new contributions, rather than selling off investments. Retirement can be 30+ years in length, so you still need a reasonable exposure to stocks and bonds for the long-term.

Investors already in retirement may be experiencing the most stress. That’s because they’re already in withdrawal mode and feeling the sting of portfolio losses. Nevertheless, it’s a great time to check in on your financial plan and zoom out to see the big picture. 

Look at your buckets of income. You may have guaranteed income from a workplace pension and/or government benefits. Maybe some rental income or earnings from a part-time job. Do you have a cash reserve to top-up your income, or are you relying on portfolio withdrawals? Can you spread out your portfolio withdrawals or take them later in the year?

Are you withdrawing solely from an RRSP or RRIF, while leaving your TFSA intact? Consider pausing your TFSA contributions or taking a small withdrawal so you don’t have to dip further into your RRSP/RRIF.

Do you have a planned one-time expense that can be pushed down the road to 2023 or 2024? This could include a vehicle replacement or home renovation.

The point is, no matter what age and stage you’re at there is likely an obvious solution or at least several steps you can take to stop obsessing over your investment portfolio and its short-term performance.

Investors with a sensible plan that takes into account their short and long-term goals shouldn’t worry about their investments. That’s because they should already be invested in a risk appropriate portfolio. If that portfolio was sensible in 2021, it’s still sensible today.

Do yourself a favour this week and stop checking your portfolio. Your mental health deserves a break. Take comfort in the fact that markets do go up over the long-term. Better days are ahead.

I recently coached a client through the process of transferring her existing RRSP, TFSA, and non-registered investment accounts away from high fee managed mutual funds and over to a self-directed investing platform. The goal was to reduce investment fees from an average of 2% on her balanced portfolio down to 0.25% with a balanced asset allocation ETF.

The asset mix wouldn’t change – both portfolios likely hold the same underlying assets – but the fee reduction is significant. It’s helpful to convert the percentage into a dollar amount. The combined portfolio size was roughly $1M, so at an average of 2% her fees were costing $20,000 per year. The new self-managed ETF portfolio would cost just $2,500 per year.

To be clear, switching to a low cost ETF portfolio is not a panacea for improving investment performance, especially in the short-term. A broadly diversified balanced portfolio is still down nearly 10% year-to-date. But by switching to a low cost ETF portfolio this client is all but guaranteed to outperform the similar high fee mutual fund portfolio over the long term.

You’d think the idea of saving $17,500 per year in investments fees would compel more mutual fund investors to make a change. But money is as much psychological as it is about the numbers. There may be a long-term relationship with the existing advisor mutual fund salesperson. He or she may even be a close family friend. Breaking up is hard to do.

When coaching clients through this process I always remind them that there’s no need to “break-up” with their advisor. The transfer of funds actually happens at the new financial institution. That’s right, if you want to move from “red” bank to “green” bank, you go to green bank and initiate the transfer from there.

Open an account at the new institution, then open the appropriate account types that mirror your existing account types (RRSP, TFSA, non-registered, spousal RRSP, LIRA, etc.).

You’ll eventually get to a section that prompts you to fund your new account with new contributions or by transferring funds from an existing account. Select that option and enter the account details from your existing institution (have a recent statement handy). Some platforms allow you to upload a statement, while others make you fill out the details manually.

Once the transfer request is accepted it can take about 10-14 business days for the funds to arrive. Your new institution contacts your existing institution to request the transfer on your behalf. 

You can transfer funds “in-kind”, meaning the portfolio moves over exactly as-is, or “in-cash”, meaning the existing institution will liquidate your entire portfolio and send a cheque to the new institution. 

Transferring in-cash is likely the preferable option in a registered account. That’s because there are no tax implications for selling your existing investments inside a registered account (RRSP, TFSA). This is not a withdrawal and a deposit – it’s a direct transfer between institutions where your funds remain in the same tax-sheltered account.

Transferring a non-registered (taxable) account requires more thought. That’s because selling your existing funds and transferring in-cash is considered a taxable event, triggering a capital gain or loss on each security sold. In this case, transferring in-kind may be a better option. 

Now, once your existing institution receives the transfer request then you should expect a phone call or email from your existing advisor asking what’s going on. Don’t be surprised if your advisor tries to talk you out of this transfer, or at least offers some parting words of wisdom.

It’s because of these often uncomfortable and awkward exchanges that I recommend initiating the transfer first before having the break-up conversation. You’re less likely to un-do what you’ve already done.

Related: Breaking up isn’t hard to do. How to transfer your RRSP.

Still, if you’re set on having the conversation ahead of time I’d recommend preparing a list of reasons why so you can respond to your advisor’s playbook of rebuttals. 

Go to Morningstar and look up your mutual fund performance versus its benchmark index and other funds in its category.

Mention the simplicity of an all-in-one portfolio and how it automatically rebalances for you. Talk about the diversification and how you’re staying invested in a similar asset mix with similar underlying holdings.

Finally, the closing line:

“It’s not you, it’s your fees.”

This Week’s Recap:

It has been a while. 

Last week I suggested it’s time to check in on your financial plan.

Earlier this month I looked at using annuities to create your own personal pension in retirement.

I was happy to be included as a panelist once again for MoneySense’s annual ETF All Stars. No surprise that my “desert island” pick is Vanguard’s All Equity ETF (VEQT).

Listen for me on an upcoming episode of the Rational Reminder podcast where I’ll be chatting with co-hosts Cameron Passmore and Ben Felix about breaking up with your mutual fund advisor and some of the incredible (and demonstrably false) rebuttals I’ve heard over the years.

Promo of the Week:

Interest rates are ticking up and yet some of you still have money parked in a big bank savings account earning a pitiful 0.01% – 0.10%.

It’s time to switch to EQ Bank’s Savings Plus Account and earn a healthy 1.50% on your emergency fund or other cash savings.

Remember, EQ Bank offered rates as high as 2.45% in March 2020 before emergency rate cuts kicked-in. As rates rise, expect some more upside here and a return to ~2% by the end of the year.

I use EQ Bank for my own emergency savings. I like that I can connect the account to my main chequing account and transfer funds within a day. I also like the fact that I can pay a bill or make an e-Transfer from EQ Bank and that there are no account fees.

Weekend Reading:

Worried about stocks? David Booth, founder of Dimensional Funds, explains why long-term investing is so crucial.

Retirees fear this falling stock market, but Andrew Hallam says our reactions to fear are more damaging than anything the markets or inflation could ever hit us with. 

As Rob Carrick explains, nothing happening with stocks and bonds lately will matter when you look back a decade from now.

Jesse Cramer explains why you’re probably using the 4% rule all wrong:

“You probably shouldn’t eat too much candy.” Is that an aggressive admonishment? Or a conservative suggestion?

If you’re a 9-year-old on Halloween, it’s aggressive. Don’t limit me! I want to eat all the candy!

But if you’re a paranoid dentist, it’s conservative. Why leave the door open to any candy consumption? Don’t you realize one mini Snickers can cause a cavity?!

The 4% rule is the same.

A must watch video by Preet Banerjee on how to manage your emotions when investing:

A really important white paper by PWL Capital’s Ben Felix on finding and funding a good life. It’s an overview of the non-financial considerations that deserve consideration in financial decisions.

Here’s Charlie Bilello on the biggest mistake an investor can make.

Crypto is a solution is search of a problem – or problems. So what is the point of crypto?

“People in the crypto space argue that it’s still early. We’re about 13 years in. At a time when technology changes rapidly, how early is that, really?”

Michael James on Money asks why do so many financial advisors recommend taking CPP early?

Finally, the great junk transfer is coming. A look at the burden (and big business) of decluttering as Canadians inherit piles of their parents’ stuff.

Enjoy the rest of your weekend, everyone!

I quit my full-time job in December 2019, three months before a global pandemic shut down the world. I watched my investments fall by 34% in the sharpest and most rapid market decline in history. I cancelled two European vacations.

While I did get a three-month head start on the whole work-from-home thing, my routine was quickly disrupted when schools shut down and my kids were sent home for online “learning”.

I dreamt of building my blog, writing, and financial planning business while travelling and working from anywhere with an internet connection. Life comes at you fast.

Instead of panicking and thinking I made a huge mistake, I stepped back and checked in on my plan. I still had a popular blog with a strong readership of people who respected my opinion. I had a secure freelance writing gig with no shortage of financial topics to write about. And I had a growing financial planning practice with an eager waitlist of clients.

Stuck at home, I doubled down on my business – writing more articles, taking on a reasonable number of clients, and finishing up the work to earn my financial planning designation. 

As we know, stock markets went on to recover their early 2020 losses and then some. My investments returned between 9 – 12% that year, depending on the account type. The LIRA I set up in April 2020 went on to return 22.5% thanks to the fortuitous timing of that lump sum contribution.

Business boomed that year and again in 2021 thanks to the work that my wife and I put in laying the foundation in early 2020.  

Fast forward to 2022 and markets are reeling again (although nowhere near as bad as March 2020). I’m still invested in Vanguard’s All Equity ETF (VEQT) across all accounts. I’m adding new money every month to our corporate investing account, picking up more units of VEQT at a discount. The way I see it, these new contributions have a higher expected return (over the long term) than they did 6-12 months ago.

Related: Exactly How I Invest My Own Money

Business is still strong, but I’ve lost a freelance writing client that made up a good chunk of income. I’m using that gift of time to work on a project that I believe can replace the missing income and fill a void in the market for want-to-be DIY investors, so stay tuned for that.

Meanwhile, I have clients at different ages and stages wondering how all of this *waves hands at everything* is going to impact their financial plan.

Should we change long-term inflation projections to 6% annually? Should we stay working for another year or more until all of this settles down? Should we sell our sensible investment portfolio and park the money in cash?

When I meet with clients I encourage them to zoom out and take a bigger picture view of their financial plan and future goals.

Are they still in their accumulation years? Are they still making regular contributions to meet their savings and investment goals?

Is their job secure? Have they negotiated a salary increase commensurate with the current inflation environment and tight labour market?

Have they looked at their own personal inflation calculator to see how their own spending stacks up against the CPI (our spending has trailed CPI by 0.6 – 2.5% over the past 12 months). Have they built in a spending buffer for the year to account for higher inflation and any unplanned minor expenses? 

Clients who are retired or getting close to retirement age may be more concerned about high inflation and poor investment returns. I remind them to focus on what they can control.

Perhaps a large one-time purchase gets delayed, for example. In most cases, we’ve built a buffer into their retirement spending that can be used for extra travel or hobby spending in good times, but can also help curb the rising cost of groceries and gas during higher inflation periods like this, or cover an unplanned expense.

I remind them of their safe withdrawal plan and that withdrawals can be spread out over the entire year (dollar-cost-averaging in reverse).

Related: Your Retirement Readiness Checklist

FP Canada issues guidelines every year that are designed to support financial planners when making long-term (10 or years more) financial projections.  The projection assumption guidelines look at items like expected wage growth (3.1%), borrowing rates (4.3%), inflation (2.1%), fixed income returns (2.8%), and stock returns (6.3% to 7.7% before fees).

Knowing the questions planners would be facing this year regarding inflation and stock return assumptions, FP Canada included some helpful guidance for planners to share with clients:

“It is not unusual for significant fluctuations to occur in the market over a short period of time. For example, a financial planner may be preparing a financial plan at a point in time following a marked increase in the stock market, or planning may occur following a major decline in the stock market.

Movements and fluctuations can also be seen in the release of Consumer Price Index results, such as a negative rate in May 2020 and then a rate near 5% in December 2021. In looking at a 2-year rolling average, 94% of the time the inflation rate was between 1%-3%, compared to 73% on a one year time frame. As of December 2021, CPI has averaged 2.32% over the last five years and 1.82% over the last 10 years.

Based on the current economic conditions, financial planners may be tempted to drastically change just one assumption, like increasing inflation to 4% for the entire retirement planning projection. By revising only the rate for inflation, the financial planner ignores the correlation that exists between inflation and interest rates and the cited asset classes. If inflation remains high, interest rates would typically go up, as well as the return on equities over the long-term. We recommend that financial planners use the projected economic assumptions as a whole and avoid attempting to personalize a forecast for the client by making a drastic adjustment to a single variable. Presenting alternate scenarios and projections to the client may be a better approach.”

Inflation will be tamed in time. Investment returns will increase in time. We have no idea when, or what will happen in the short-term. But we have much better information about long-term trends.

For instance, if expected global stock returns are between 6-8% per year on average over the very long term, and the previous 10-year period averaged 12.66% per year, that should tell us to expect lower returns over potentially the next decade. We should also expect a negative year from time-to-time. What we shouldn’t expect is global stocks to continue posting double-digit returns every single year.

Viewed through that lens and it’s no surprise to see that stocks are down so far this year. Does that mean you need to change your perfectly sensible portfolio of low cost ETFs? Of course not. Falling stock prices is a feature of their risk-reward trade-off, not a bug. But those who stick to their sensible strategy tend to be rewarded over the long term.

Final Thoughts

They say plans are worthless but planning is everything. Check in on your financial plan. Do the decisions you made at the time still hold up? Or should they change based on new information?

It’s normal to have second thoughts about your financial decision making when faced with high inflation, declining stock prices, a global pandemic, or an unprovoked invasion marking the biggest war in Europe since World War Two.

There’s no need to tinker with a low cost, globally diversified, and risk appropriate portfolio. It didn’t “stop working” just because prices have fallen. As Ben Felix says, your investment strategy shouldn’t change based on current market conditions.

Indeed, for those in their accumulating years, take advantage of falling stock prices and keep adding to your portfolio (just like it said to do in your financial plan).

If you’re in the retirement readiness zone, and nervous about your investments and inflation, it’s certainly reasonable to consider postponing retirement until the situation improves. Check in on your financial plan anyway, just to make sure you’re not just falling into the “one-more-year” trap.

Finally, if you’re already retired and spending down your investments then this environment can feel downright nasty. A financial check-in might be in order to see if your level of spending is sustainable, your investments appropriately allocated, and that your other assets and income streams have been optimized in your retirement plan.

Decisions can be revisited, like when to take CPP and OAS (if you haven’t already), whether you should downsize, or sell your home and rent, whether to complete that kitchen renovation or put it off for a year or two. These choices, that are within your control, can positively affect your retirement plan – more so than trying to hit a home run with your investments to make up for 2022’s losses.

If you’re ever looking for a sober second thought – an unbiased look at your financial plan and future goals – check out my fee-only advice page and give me a shout. I’d love to help.