6 reasons you may want to change your investment strategy amid COVID-19
The first six months of this year have been testing for the Canadian economy. In March, the financial markets took a turn for the worse, dropping around 35%, due to fears and uncertainty surrounding COVID-19. However, since that dip, the market has surprisingly bounced back in recent weeks and has shown strong gains, even though most of the country has yet to fully reopen. Now, as we begin to put the pieces of our economy back together and adapt to the ‘new normal’ amid COVID-19, it is a perfect time to take a look at our personal finances and investment strategies. Many people had not factored in the possibility of a seismic shock to the financial markets and are now rethinking their investment strategies and, especially, their risk tolerance. Although it might not apply to everyone, if you are considering an adjustment to your investment strategy, keep reading!
Reasons to adjust your investment strategy:
1. You overestimated your risk tolerance.
Whenever the stock market starts to drop, we are told to stay the course and to not change a thing. This is because, as history shows, the market will readjust and recover, usually higher than it was before. However, when the financial markets drop like they did in March, it is normal for some investors to get wary and want to cut their losses. If the rollercoaster of highs and lows is too much for you, this actually may be a good time to readjust your risk tolerance with your advisor. It’s of paramount importance when investing to be fully comfortable with your asset allocation and for it to reflect your risk tolerance. This will save you a lot of anxiety over time as, without doubt, the market will continue to have large swings periodically. Please talk to your advisor if you are thinking about changing your risk tolerance.
2. Your portfolio isn’t diversified enough.
The art of diversification is spreading out your investments into different industries, sectors and regions. This helps to limit your risk if the market, or certain sectors of the economy, experiences a downturn. If your portfolio isn’t diversified, you are leaving yourself exposed to getting hit disproportionately hard in the case of an unforeseen event. This might be a good time to reassess your portfolio and make some necessary changes. A great way to diversify without too much hassle is to invest in a broad leading index. For example, the S&P/TSX 60 is comprised of the top 60 companies on the Toronto Stock Exchange and is diversified across 11 different sectors (at May 29, 2020). Investing in an index fund makes diversifying your portfolio more straightforward. It is definitely something worth talking to your advisor about.
3. You took on too much risk with a short-term investment.
If you recently lost money in the stock market that was intended to be a short-term investment, you may want to rethink your investment strategy. Any investment in the stock market should be given at least a five-year time horizon; some would say closer to 10 years. If you had planned to invest for a short while, make some money and then get out, you were probably stunned when the market started to drop. If you cannot live without the money you are investing for at least five years, you may want to look at a safer option than stocks. A high-interest savings account or bonds may be better suited for your money that will be needed in the short term. This could be money you are planning to use to buy a car or to put towards a down payment on a house.
4. Your investment fees are too high.
If you are working with an advisor who chooses and handles your investments for you, it is a great time to look into the fees you are paying. Understand how the fees that you are being charged affect your investments. Many people hear about the stock market making big gains only to see that their portfolio has only increased modestly over the same period, due to fees. If there is a large discrepancy between what you think you should have earned and what you did earn net of fees, it may be the time to start a discussion with your advisor and negotiate these. It may be more beneficial for you to invest some of your money yourself, perhaps into a previously mentioned low-cost index fund. These types of funds generally have low fees and track the returns of an underlying index.
5. You have money that you want to invest.
As long as you are not nearing retirement, investing in the stock market almost always makes sense. Although the market has been volatile of late, this shouldn’t scare you if you are able to invest for the long term because your money will have time to recover from market dips and fluctuations in the future. It is also a great time, as always, to contribute to your specified plans such as your Registered Retirement Savings Plan (RRSP) or your Tax-Free Savings Account (TFSA). If you are nearing retirement, though, a safer, less volatile investment like a government bond, GIC, or another investment that has the principal protected may be a better option.
6. You’re retired and don’t want all your money tied up.
If you are retired, you may be wondering what this market drop means for you. As your investments are beginning to recover, you will want to have accessible cash. It is recommended that you have enough cash, or money in short-term bonds/GIC’s, to cover your living expenses for at least five years. This guarantees that you won’t need to dip into your more risky investments to fund your basic lifestyle. Although the market may correct itself sooner than five years, it doesn’t hurt to be cautious in circumstances like these. It might be detrimental to your RRSP savings if you are forced to withdraw when the market is still in recovery mode.
It is always risky to change your investment strategies while the market is in a volatile state. However, if any of these six reasons applies to you, it is beneficial to talk to an advisor and discuss your options. Even if you don’t want to take the risk and make any changes right now, these are good tips to keep in mind for the future.
If you have any questions or wish to talk to an advisor, please reach out to me, Brian Moylett, at email@example.com, or call/text at 778-951-2806. I would be happy to answer any questions you may have and help in any way that I can.
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