Pattie Lovett-Reid: How investors should react to sudden market turmoil
Here comes Santa Claus…maybe?
If you are expecting a Santa Claus rally, you likely aren’t alone. The Dow punched through 24,000 Thursday, and while 24,000 is just a number with little technical or fundamental significance for this aging bull market, it is still a nice round number.
Every time the Dow crosses another 1,000-point barrier, those sitting on the sidelines are encouraged to join the party. The U.S. markets are higher across major indices, while the TSX continues to flirt with record highs – and is standing a better chance of achieving that now that OPEC agreed to production cuts through 2018.
Daily headlines are a mixture of optimism and pessimism. We still have lingering doubts around NAFTA renegotiations, the Fed is likely to deliver a rate hike in December, tax reform while inching forward still not crossing the finish lin. Sweeping tax reform will balloon the deficit with gains of approximately $407.5 billion in revenue over a decade through economic growth but clearly not compensating for the $1.41T cost.
Investors are shrugging off just about everything – except tax reform, which is one step closer to reality.
Still, as an investor, it is easy to have twitchy fingers. Getting into the market or wanting to get out even though we all know trying to time the market is a dangerous strategy.
Adrian Mastracci, a discretionary portfolio manager with B.E.E., says before you react in any form, put a framework around your decision making and ask yourself a few questions:
1. How will you react to a new investing norm?
2. Do you prefer to sell your stocks to stop the financial pain when markets stumble?
3. Can you stomach classic “buy and hold” approach when stocks are lower?
4. What will you do when stock prices continue to keep falling?
5. How will you get back into the market?
6. Have you thought about the approach to the bonds you own?
“Be absolutely clear on which is more important to you: return OF capital versus return ON capital,” Mastracci says. Depending on your answer you will require a different portfolio structure.
All too often we let emotions dictate our investment decisions and make big bets on our portfolio before we have thought through the ramifications.
Knee-jerk reactions in response to real risks can lead to financial regret.