The Value of Perspective

Being bombarded with data, headlines, and predictions presented as being impactful to your financial well-being can evoke strong emotional responses from even the most experienced investors. The period from 1999 – 2009 is known as the “lost decade” in the US stock market. It was a ten-year period of flat stock returns. Headlines from this time period are illustrative of the type of information that may have led market participants to question their approach.

  • May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time
  • March 2000: Nasdaq Stock Exchange Index Reaches an All-Time High of 5,048
  • April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
  • October 2002: Nasdaq Hits a Bear-Market Low of 1,114
  • September 2005: US Home Prices Post Record Gains
  • September 2008: Lehman Files for Bankruptcy, Merrill Is Sold

While these events are now a decade or more behind us, they still serve as an important reminder. For many, feelings of elation or despair can accompany headlines. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing.

If, despite the jarring headlines, one had invested $10,000 CAD in US stocks in May 1999 and stayed invested, that investment would be worth approximately $25,100 CAD by the end of April, 2018.  When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility and help them look beyond the headlines.

We always have to remember that market timing, no matter how tempting or seemingly obvious, does not work. Avoiding market timing may be easier said then done, but having a grasp of the evidence, and an investment philosophy that you can believe in, can make staying invested far more palatable.

Tuning Out the Noise

Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with your willingness and ability to bear risk. It also helps to remember that if returns were guaranteed, you would not expect to earn a premium above the risk-free rate. Creating a portfolio that you are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may ultimately lead to a better investment experience.

As with many aspects of life, we sometimes seek assistance in reaching our financial goals. The best athletes in the world work closely with a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track.

The right financial advisor can play this vital role for an investor. A financial advisor can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most. When a financial advisor is able to accomplish this, peace of mind is the inherent result for the investor.

A recent survey conducted by Dimensional Fund Advisors found that investors who work with a financial advisor place the most value on the sense of security they receive from their relationship.

Exhibit 1. How Do You Primarily Measure the Value Received from Your Advisor?

DFA - Tuning Out The Noise

Source: Dimensional Fund Advisors. The firm surveyed almost 19,000 investors globally to help advisors who work with Dimensional better understand what is important to their clients.

For those who are not comfortable managing their own wealth, or those who are not interested in taking the time to become comfortable, a relationship with the right financial advisor can be an important part of tuning out the noise of the market while staying focused on the end goal. This is exactly why we work with our clients to explicitly define and quantify their financial goals and determine the best path to achieve them.

Having an investment philosophy that you believe in and a relationship with a knowledgeable financial advisor who understands your goals are two of the best moves toward a positive investment experience.

 

1. In CAD. As measured by the S&P 500 Index. A hypothetical portfolio of $10,000 CAD invested on April 30, 1999, and tracking the S&P 500 Index, would have grown to $25,100 on March 31, 2018. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index.

Source: Dimensional Fund Advisors Canada ULC (Dimensional Canada).