For many consecutive months through the pandemic, investors enjoyed a smooth ride to ever higher returns. That solid trajectory of growing portfolios and wealth has been replaced by market swings within one day and over the course of a week.
This is not to say that portfolios aren’t still growing — they are. It’s just that in a choppy market, price makes little overall progress up or down, and growth happens in fits and starts. I describe it as the market is grinding forward, taking the path of least resistance. Thankfully, the path of least resistance is still to move higher. We aren’t going to see market surges where we hit and reset all-time highs — something we’ve grown used to as the markets have spoiled us. But we will still be able to grow portfolios.
This choppiness is happening for several reasons. On a macroeconomic level, the current environment is one where policy at the central bank level is poised for a change. To this point, both the Federal Reserve in the U.S. and the Bank of Canada here at home have been focused on keeping interest rates low and pumping money into the financial system to help ease the impact of COVID-19. In other words, central banks have been doing what they were designed to do: help the economy grow.
Now, as restrictions are lifted and economies begin to reopen, the emergency measures put in place at the start of the pandemic will start to wind down. While it hasn’t happened yet, short-term interest rates, which are currently sitting at near zero in the U.S.1, are expected to rise as the economy accelerates. In Canada, the better-than-expected strength of the economy has the Bank of Canada considering raising interest rates in 2022 as opposed to 2023, which was the initial target.2 The market doesn’t like change, especially this kind of change. Another thing the market doesn’t like: raising taxes. President Biden has proposed raising the long-term capital gains tax on households making more than US$1 million.3
From a micro-economics or company-specific perspective, a lot of investors are also starting to question whether or not the markets have over-achieved and this is as good as it gets. We’ve seen a number of consecutive quarters that have been better than the quarter before. We’ve seen certain companies, especially large-cap tech companies such as Apple, Amazon, Facebook, Microsoft, and Google, achieve surging earnings growth. Will they be able to maintain that growth?
Given this context, the markets have every reason to be choppy. So what should you do as an investor? I have four key pieces of advice:
- Don’t panic. When I’m asked if I’m nervous about the choppiness, I say no. I was expecting some sort of pull back. Investors don’t like to hear this but a 5% to 10% decrease within the course of a year is normal. That doesn’t mean the year is going to end badly. In fact, I think the year will end on an upswing.
- Be careful. Do not chase the latest fad or trend. This is never a good approach, but when everything was only going up, it maybe wasn’t as much of a concern because everything seemed to be making money. This is no longer the case. Focus on good quality companies that are profitable and have solid growth prospects. Do your homework. It won’t be as easy for investors to make money going forward.
- Diversify. This is very important in this environment. Diversification is the best way to protect your portfolio and your wealth.
- Work with an investment advisor. I think the need to work with an advisor with a proven track record who you trust will become even more important over the next few years.
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My approach to investing is straightforward. I study the markets, global economies and what’s happening within industries to be in a position to best help my clients find good quality investments that will help them meet their goals. I build custom portfolios for each client. I welcome you to call me at 416-332-3863 or email me at firstname.lastname@example.org.
- Fed holds interest rates near zero, sees faster growth and higher inflation, CNBC
- A stronger-than-expected recovery has Bank of Canada eyeing interest rate hikes in second half of 2022, Financial Post
- Wealthy investors may be in for a capital gains tax hike. Here’s how they’ll manage, CNBC