Recent stock and bond market turmoil has many investors thinking about making changes to their portfolios.
Indeed, mutual fund investors may be wondering whether it’s the right time to switch from their expensive financial advisor to a low-cost portfolio of index funds using a robo advisor or online brokerage. DIY investors may be pondering changes to their investment strategy.
On the one hand, the market downturn presents a great opportunity to capitalize on buying investments “on sale” and can potentially take advantage of crystallizing a capital loss in taxable accounts.
On the other hand, you don’t want to panic-sell your existing investments and take a loss. Also, sitting in cash and waiting for the market to rebound could mean buying back in at a higher price.
So, should you move your investments, make a change, or stay put until the market rebounds?
Take a Breath
To be clear, investors shouldn’t change their investment strategy based on current market conditions. We know that investment risk means there’s a chance your portfolio can lose value in any given day, week, month, or even year. We also know, historically, that markets have twice as many ‘up’ years as they have ‘down’ years.
What we don’t know is in which order or sequence these events will occur. So that means staying the course and staying invested will give investors the best chance at capturing those up days and achieving a favourable outcome (i.e. making money).
Evaluate Your Portfolio
We also know that investors are emotional and prone to market timing, performance chasing, panic selling, and other bad behaviours that are hard-wired into our brains.
The past decade of strong returns has made us overconfident of our capacity for risk and led many investors to chase speculative returns from cryptocurrency, cannabis, disruptive technology, and other exploding fads. It has led us to invest short-term money that may have been better off in the safety of a GIC or high interest savings account. And, it has fooled us into believing that investment fees don’t matter, as long as the performance is strong.
The first thing investors need to do is take a hard look at their existing investments and determine if they still make sense. In other words, do your investments match your risk tolerance, your time horizon, and provide you with proper diversification? Are you paying an advisor to actively beat the market, and, if so, how did their performance stack up?
If you already have a sensibly constructed portfolio of index funds or ETFs, then it’s probably best to just hang on and weather the storm. That’s right – do nothing!
The rest of this article is aimed at investors who may need to make a portfolio change.
Reframe Your Thinking
Many investors find that a market downturn like we’ve recently experienced is an opportune time to change investment strategies. Maybe your advisor’s promise to ‘protect your downside’ didn’t pan out as your portfolio plunged in value. Perhaps your stock picking prowess wasn’t as good as you’d hoped. Or, you finally realize the old adage that nobody cares more about your money than you do.
Whatever the catalyst, you need to know if now is the right time to make a switch. And, if it is, where to move your money and how to invest it going forward.
First of all, forget the notion of selling low and buying high. Changing investment strategies simply means moving your already invested money into either a more risk-appropriate investment or to one with a higher expected return (due to lower fees or broader diversification).
I went through this myself during the last oil price collapse in 2015. At the time I held 20+ Canadian dividend paying stocks, and the handful that were in the energy sector got hammered and lost 30-50% of their value.
When I made the decision to switch to index investing, I had to sell all of my individual holdings, including the ones that were down in value. Most investors have the mindset to want to hold onto their losing investments until they recover. But I had to reframe it and think of my individual stock holdings as one large portfolio ($100,000 at the time). I was moving that $100,000 from 20 ‘riskier’ Canadian individual stocks to a more diversified two-ETF solution that held many thousands of stocks around the globe.
So, you’ll want to think about your portfolio as a whole lump sum instead of a collection of individual parts. You can move that lump sum to another platform, be it a robo advisor or self-directed discount brokerage. All the while you’re going to remain invested – outside of potentially a day or two when you sell your existing holdings and set up your new portfolio.
DIY vs. Robo: Decide on the Platform
Are you a hands-on investor who wants to take control of your investments and slash your fees to the bone?
Great, you’re a prime candidate to switch to a self-directed online brokerage. In the name of simplicity, I’d recommend one of the following three options:
- If you bank at one of Canada’s big banks (like TD or RBC) then just open an account at their discount brokerage arm.
- If your banking is scattered around at different places, or you bank at a credit union without a discount brokerage arm, consider opening an account at Questrade.
- And, if you’re just starting out and have basic investing needs such contributing regularly to an RRSP, TFSA, or non-registered account, then consider using Wealthsimple Trade.
But, maybe you find the idea of DIY investing is a bit intimidating. In that case you’ll want to consider a robo advisor.
With a robo advisor, you’ll get a hands-off experience where all you need to do is fund the account and contribute regularly. The robo advisor handles the rest, from setting up a portfolio of index ETFs, to automatically monitoring and rebalancing your investments. They can even automate withdrawals for retirees.
Building Your Portfolio
Investors who’ve chosen the robo advisor path need not worry about this section. When you open an account with a robo advisor like Wealthsimple you’ll answer some basic questions around your risk tolerance, experience, and investing time horizon. Based on those answers, you’ll get placed in a diversified portfolio of stock and bond ETFs.
For those who’ve chosen the DIY investing path, the investment choices are much more difficult. There are so many stocks and ETFs to choose from that it’s enough to confuse even the most knowledgable investors.
To make things simple, you should probably stick with a single asset allocation ETF. These all-in-one solutions hold a pre-determined mix of Canadian, US, international and emerging market stocks, plus Canadian, US, and international bonds. They automatically rebalances this mix when markets move up and down, so you don’t have to worry about tinkering with your portfolio.
You should avoid individual stocks as a general rule unless you simply cannot help scratching your stock picking itch, in which case you should limit individual stocks to a small portion (say 5%) of your portfolio.
The same goes for riskier ETFs that invest in specific sectors like oil & gas, cannabis, or biotech, or ones that trade in commodities and futures. And, please, steer clear of any ETF that has “Triple leveraged Bull/Bear” in the title.
It’s tempting to look at stocks or sectors that have been badly beaten up during the latest market turmoil, but these investments can be highly speculative and risky – they should not be the foundation on which your investment strategy is made.
The first half of 2022 was one of the worst six-month periods in history for stock and bond investors. Stocks and bonds have since rebounded, but plenty of economic certainty remains.
Investors may still be feeling angst about their portfolios. The ones who didn’t panic and stayed the course have likely seen their portfolios recover some losses. Passive index investors know they should accept the ups-and-downs of the market and not abandon their strategy as economic or market conditions change.
But the latest crash also may have also exposed the flaws in our portfolios. Our allocation to stocks may have been too high after years of strong returns. Many more have strayed into speculative investments instead of sticking with core broad-based indexes. New investors might have put short-term money (like for a house down payment) into the market expecting a quick profit. Still, others are paying too high of fees for their managed portfolio of investments.
For those investors, now is as good a time as any to re-evaluate your portfolio and consider changing investment strategies.
Just remember that changing approaches does not mean market timing or selling low and buying high. You’re simply moving your already invested money into a potentially more risk-appropriate, lower cost, and globally diversified investment portfolio with a robo advisor or self-directed online brokerage.
Have you moved your investments or changed strategies in 2022? Let me know in the comments.