Don’t succumb to red lights

Photo Eduardo Munoz Alvarez, Associated Press

Monday was again very lively on all stock exchanges around the world and, above all, colored strongly red.

Jean Philippe Decarie

Jean Philippe Decarie
The press

In the past three months, there has certainly been no rest in consulting the ratings of the most important stock market indices directly. Because it is red, which mostly characterizes the daily behavior of the indices, and the movement only seems to be accelerating, as shown by the S&P 500 index, which has entered correction mode by accumulating a depreciation of more than 20% has since the beginning of the year.

Posted at 6:30am

Monday was once again very lively in all stock markets of the world and above all it was colored strongly red, a bloody red, as if the latest inflation statistics in the United States had sounded the alarm and raised general awareness that the situation is far from under control and even in danger of getting worse.

Small consolation, despite the S&P/TSX’s sharp 2.6% drop on Monday, the Canadian stock market has yet to suffer the kind of depreciation seen in US or European stock markets since the beginning of the year.

We may not have entered a bear market, but the Canadian market has now officially entered a correction, having lost more than 10% of its value since peaking earlier in the year. It also smells a bit depressed at home.

In such circumstances, it is important to remember that market corrections, regardless of their severity and duration, are part of the life cycle of stock market investing. When markets start to turn backwards and show no signs of changing direction anytime soon, our instinctive reflex is to desperately break out of this hellish and scary spiral.

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

On Monday, finance agency Reuters recalled that from 1946 to date, the S&P 500 index has endured 13 bear markets, posting average losses of 32.7%, including the brutal 57% drop during the 2007-2009 financial crisis.

On average, the index bottoms out a year after it was officially declared bearish (after accumulating a 20% loss). Historically, it takes two years for the index to get back to the high it started from.

The last bear market in the S&P 500 lasted just a month between February and March 2020, when the pandemic hit, while the longest bear market will have lasted 69 months from the bottom to the top when the market was in decline from 2000 to 2003 .

The Dangers of Synchronicity

Many investors still have the reflex to want to sell their positions or even their equity funds as soon as their portfolio shows a valuation loss that is too high in their eyes.

The idea is to salvage what’s left instead of continuing to live the agony of witnessing the depletion of one’s savings. Many plan to quickly get back into the market when it resumes its uptrend.

A good risk, but not very profitable. Attempting to exploit the so-called price effect, by selling when the market falls and buying back when the market rises, is actually the opposite approach to what an investor should be taking.

“You have to buy when prices are low and sell when prices are high. You cannot fight against market fluctuations and risks. When the market falls, we wait and buy back at a low price to resell the securities when their value rises,” reminded me in a very basic way, Neil Cunningham, CEO of PSP Investments, which manages $230 billion in assets and plans pensions for federal employees.

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

Nobody likes to see the red lights flashing, nobody likes to read their investment statements to see the holes that are suddenly appearing in their life savings. But anyone who knows and can endure these cyclical episodes will recognize five years later that it was worth being patient and not succumbing to the sell-off reflex.

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