June 24, 2022

What to do (and not do) during a market sell off

A traditional 60/40 balanced portfolio of Canadian stocks and bonds is down 11% YTD in 2022 (as of June 21), being one of the worst starts to a year on record. Both the stock market and the bond market have fallen in unison, with the Canadian bond market on pace for its worst year in history. This situation is not unique to the Canadian markets, as global markets are also experiencing massive sell offs in both stocks and bonds. Market corrections like this are normal and expected, and history can teach us some important do’s and don’ts during market turmoil.

Don’ts

Don’t panic sell. No investor likes to lose money. When markets are falling rapidly it may seem like a good idea to sell your investments. However, doing so effectively locks in your losses and leaves you on the sideline, introducing a new problem of When do you buy back in? Our experience has shown that most investors do not have the fortitude to buy when they should.

Don’t try to time the bottom. Markets are forward-looking and begin to recover before the dust settles and investors likely don’t have the courage to buy back in until the recovery is well underway. Missing this recovery is detrimental to an investor’s overall return.

Don’t check your portfolio every day. The digital age has allowed investors to watch markets in real-time which can cause unnecessary stress. Over time, markets increase in value as the economy grows.  In the short term, however, markets are very volatile. This volatility can drive investors to make poor decisions and negatively impact long-term returns.

Do’s

Do review your long-term investment strategy. Taking a long-term view is important during a market sell off. While market corrections are stressful, the stock market has recovered from 100% of corrections in the past and continued to reach new highs.

Do rebalance your portfolio. Setting up a strategic asset allocation based on your risk tolerance forces you to sell assets that are priced high and buy assets that are priced low. This disciplined approach to investing ensures your portfolio is consistently positioned where it needs to be.

Do consider alternative investments. 2022 has shown investors that traditional “safer” asset classes like bonds can be volatile. Alternative investments provide investors with exposure to investments that are less correlated with traditional asset classes and allow investors to diversify their portfolios even further. It would also be worth thinking about whether your existing investment advisor was proactive in protecting your portfolio in 2022.

Northfront specializes in investment management, financial planning, and alternative investments. If you would like to learn how alternative investments can complement your portfolio, please connect with us.

About Northfront Financial

Northfront Financial, based in Calgary, Alberta is a boutique full-service financial planning firm serving professionals and business owners. We pride ourselves on being a different kind of investment firm. This stems from our humble roots, entrepreneurial spirit, and a culture of integrity and professionalism. Our goal is to offer the best investment products, services, advice, and ideas the financial industry has to offer from our experienced team, which includes individuals with the Chartered Financial Analyst® (CFA®), Chartered Investment Manager (CIM®), and Certified Financial Planner™ (CFP™) designations.

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