Five timeless principles for investing success

While investing in volatile times can sometimes challenge your discipline and commitment, there are timeless principles to include in your investment strategy that can help ease your mind and keep you focused on the long term.

1 - Think diversification

It’s rare for any investment to repeat as a top‑performer from one year to the next. Diversifying across various economies, businesses, countries and popular investment classes can help spread risk, remain more consistent and reduce the potential for underperforming assets to impact your portfolio.

Historical Asset Class Rotation, 2010-2020

The chart shows the calendar year returns of the following asset classes each year as a percentage.  The chart displays eight asset classes and their calendar return each year from 2010 - 2020.  This chart  identifies each year, from 2009 to 2019, the different top and worst performing assets, showing that it’s rare for any one asset to repeat as a top performer or worst performer from one year to the next.  The Diversified Portfolio is neither the top or worst performing assets from 2009 – 2019.  The point being a diversified portfolio can help spread risk, remain more consistent and reduce the potential for underperforming assets to impact your portfolio.

Source: Morningstar Direct as of December 31, 2020. Returns in CAD $. Performance histories are not indicative of future performance. An index is unmanaged and cannot be purchased directly by investors. The indices cited are widely accepted benchmarks for investment performance within their relevant regions, sectors or asset classes, and represent non-managed investment portfolios. Although these indices are similar to the fund’s objectives, there may be material differences including permitted holdings or investment strategies, which may impact returns. Please refer to the Fund Facts of the fund for more information. Global bonds represented by Bloomberg Barclays Global Aggregate Total Return Index. Canadian Bonds represented by FTSE TMX Canada Universe Bond Index. Canadian equities represented by S&P/TSX Composite Total Return Index. U.S. equities represented by S&P 500 Total Return Index. Global equities represented by MSCI World Net Return Index. International equities represented by MSCI EAFE Net Return Index. Emerging Markets equity represented by MSCI Emerging Markets Net Return Index. Diversified portfolio represented by a combined portfolio (15% S&P 500 TR Index, 10% S&P/TSX TR Index, 20% MSCI World Index, 15% MSCI Emerging Markets Index, 10% MSCI EAFE Index, 20% Bloomberg Barclays Global Aggregate Total Return Index and 10% FTSE TMX Canada Universe Bond). 

2 - Be rational, not emotional

In good times, investors are excited, they want to invest more and often “buy high”.

When markets turn negative, investors become fearful and decide to cut their losses and “sell low”.

Stay disciplined and committed to your long term investment plan to avoid riding the emotional rollercoaster.

An investor’s emotional rollercoaster

This chart shows how market performance, in a rising market or declining market has an influence on investor’s behaviour.  During periods of market volatility, investors become “emotional” which can lead to irrational decisions which will have negative consequences to their investment portfolio. When the market starts to rise, the investors are feeling optimistic and excited.  Once the market is at an all-time high or peak, the investors feels euphoric and confident, often making  their initial investments at this point. Once it peaks, the market may starts to become volatile and declines in value, investors start to feels some sense of fear and anxiety. But they may still hold onto their investments, as they convince themselves they are “long term investors” while shrugging off short-term volatility. But as the market continues to decline and enters into a ‘bear’ market which is defined as being a drop of 20% or more from its 52 week peak, investors starts to feel panic and capitulation has set in, investors feel all hope is lost. It is generally at this point is when many investors start to sell their investments at prices well below their original acquisition price. Over time, the market starts to rise, the investors are feeling optimistic and excited. The cycle starts again.    The key lesson is investors need to not react emotionally to market volatility and make irrational decisions. In doing so, it will have negative consequences to their investment portfolio.

Source: Hays Advisory. This chart is an example and does not represent the performance of any actual investment. This is not meant as investment advice. For illustration purposes only. 

3 - Missed days means missed opportunities

The difference between investment success and disappointment can boil down to a few days of being in or out of the markets.

By staying fully invested and not missing the best 20 investment days over the last 20 years, an investor would have more than doubled their investment.

Growth of $10,000 in S&P/TSX Composite Total Return Index from 1999-2020

This chart shows why investors should stay invested in the market. Hypothetically an investment of $10,000 in the S&P/TSX Composite Total Return from 1999 and held to 2020, would have resulted in a portfolio worth approximately $45,000.  Alternatively, if the investor had invested the same $10,000 but had missed the best 20 investments days over the last 20 years, the investment would only be worth approximately $16,000. The difference between investment success and disappointment can boil down to a few days of being in or out of the markets.  By staying fully invested and not missing the best 20 investment days over the last 20 years, an investor would have more than doubled their investment.

Source: Morningstar Direct, December 31, 2020. For illustration purposes only. Average 1yr return calculated by annualizing the average daily return assuming 280 trading days in a year. May not exactly match actual annualized returns due to calculation methodology. Past performance is not indicative of future performance. Index: S&P/TSX Composite Total Return Index. The index is unmanaged and cannot be purchased directly by investors. The rate of return shown is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the investment fund or returns on investment in the investment fund. © 2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar not its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

4 - Measure performance over time, not overnight

Accept the fact that markets will rise and fall but over time markets have always moved higher.

Taking a long‑term perspective can help you stay the course when markets move from crisis to opportunity and back again.

Keeping a long-term view

Despite setbacks, the S&P/TSX Composite Total Return Index shows growth over the long term

Despite setbacks, the S&P/TSX Composite Total Return Index shows greater growth over the long term from 1975 to 2020. Some investors often fear market volatility as a reason for them to not to invest in the market. However, for long term focused investors this chart shows the impact of various “bear markets” events such as the 2000 Dot-com crash, the 2008 Financial Crisis and the most recent Q4 2018 Sell Off on the S&P/TSX Composite Total Return Index. Even though the S&P/TSX Composite Total Return Index did drop after each event, over time the S&P/TSX Composite Total Return Index recovered and rose well above the previous lows. For long term investors, accept the fact that markets will rise and fall but over time markets historically have always moved higher. Taking a long-term perspective can help you stay the course when markets move from crisis to opportunity and back again.

Source: Morningstar January 1, 1975-December 31, 2020. For illustration purposes only. Green circles indicate periods of market decline. Past performance is not indicative of future performance. S&P/500 Composite Total Return Index. The index is unmanaged and cannot be purchased directly by investors.

5 - Turn market volatility to your advantage

By investing a fixed dollar amount in regular intervals dollar‑cost averaging can help you buy more units of an investment at lower prices, and fewer at higher prices.

This helps take the worry out of making a single lump sum investment at the wrong time.

12-month comparison:

$12,000 Single Lump-Sum Investment vs. $1,000 Monthly Investment using Dollar-Cost Averaging

Over time, your average price per unit will be lower than if you invested all your money at one time.

For illustration purposes only.

Discover how timeless investment principles can help you manage risk through all market conditions and improve your investment results.

Contact your advisor.

Work with an Investment Advisor

Buy low, sell high is still the best way to accumulate wealth, and a volatile market could provide an unprecedented opportunity to buy low.

It is important that you work with a professional investment advisor to remove the emotions from your investment decisions and to make the best choices possible with the information available. He or she can answer any question you may have about the market and your portfolio and help you determine the best course of action for you.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts as well as the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Manulife, Manulife & Stylized M Design, Stylized M Design and Manulife Investments are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

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