With stock markets, cryptocurrencies and technology shares off to a rough start in 2022, financial experts say now is a good time for a gut check on your overall risk tolerance but not the best time to abandon your long-term investment strategy.
Markets have largely been in a downturn since the start of the year amid escalating tensions around Russia and Ukraine, the ongoing spread of the Omicron wave of the COVID-19 pandemic, and speculation that interest rates are set to rise amid rapid inflation.
The all-country index and S&P 500 have fallen roughly eight per cent so far in 2022, with the Nasdaq Composite set for its worst start to the year since 1980 as high-flying technology shares fall out of favour.
Shares in heavyweights like Shopify and Netflix have fallen more than 30 per cent since Jan. 1, for example, with drops of more than 10 per cent from Apple, Tesla and Facebook’s parent company, Meta.
The S&P/TSX Composite, the benchmark index for Canadian markets, has fared better so far this year but is still down 3.5 per cent from the start of the month.
Derek Dedman, portfolio manager at Watson Di Primio Steel Investment Management in Ottawa, points to the general “uncertainty” of the moment as the leading cause of the recent downturn.
The companies that have seen the most growth during the past couple of years — think tech, health stocks — are also those primed for contraction as the market regresses, he says.
“If certain areas were getting more hot than the others, then I think there’s a potential for them to cool down a little bit faster.”
Portfolios that are weighted more toward higher-risk, higher-return investments are therefore more likely to be hit during a possible market correction.
It’s not just traditional stocks that are off to a bad start in 2022. Cryptocurrencies are also taking heavy losses, with Bitcoin losing more than half its value since the start of the year.
Some, including Meta’s former digital currency lead David Marcus, have dubbed the phenomenon a “crypto winter.”
Emotions critical to manage
While Dedman says he can’t advise the general public one way or another about whether to buy cryptocurrencies, he notes the lack of consensus on the “true value” of such products makes them even more vulnerable to market swings.
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Serious investors or even those curious about getting exposure to digital currencies have to consider their risk tolerance before buying or forgoing Bitcoin and other crypto options.
“In a newer so-called asset class, there’s going to be even more emotions at play,” Dedman says.
Natasha Knox, principal of Alaphia Financial Wellness in British Columbia, works with clients to help them mitigate the impact of emotions on all aspects of their finances.
“The negative emotions that people experience around this kind of market volatility are as numerous as people themselves,” she tells Global News.
“It can be a feeling of absolute panic, terror. It can surface all kinds of fears. … The mind goes off and catastrophizes and generalizes because that’s what our minds do: ‘This is falling, then I will never be able to retire or I’ll never be able to do this or different things.’”
Both Dedman and Knox say that what’s critical to remember during downturns is that corrections are natural and inevitable parts of market cycles.
While selling a tanking stock might provide an immediate sense of relief, doing so could jeopardize the longer-term investment strategy you had in mind when you first set up the portfolio.
“Trust the asset allocation and the work you’ve done in your portfolio, trust you know what you own and why you own it, and trust that you have a long-term objective and stick to that,” Dedman says.
“You don’t want to do damage to your long-term prospects because of your short-term fear.”
Knox sympathizes with investors who might see a sudden drop in their investments, but agrees that long-term perspectives are necessary.
“Seeing that dip in real numbers, you know, that gets really frightening,” she says.
“They have to be looking at the 30-year vision, not the today-vision. That’s where our minds have to go now. That’s easier said than done.”
Gut check on risk tolerance
Some investors might be more comfortable with drastic rises and falls in their portfolio, but risk tolerance is a “very fluid” thing, Dedman says. While an investor might feel great about risk during an upswing, the hard times can quickly bring real risk tolerance into perspective.
“Maybe my portfolio was too risky because when we did start seeing some volatility and I started seeing some prices drop, I had a tough time and I wasn’t sleeping well at night and I had this inclination to move and I was having to phone my advisor every three days,” he says.
While Dedman says it’s usually best to wait for markets to normalize before making a move, he says after a market correction is a good time to look at the balance of your portfolio and determine whether the weighting of high-, moderate- and low-risk investments is appropriate.
Knox says this is a balance that some do-it-yourself investors find difficult to strike.
There will always be “cutting edge” products like cryptocurrency in the market that offer high potential upsides in exchange for bigger risk, she says.
But knowing how to make those “shoot the moon” calls while ensuring the rest of your portfolio has a more balanced spread is critical to long-term financial stability, Knox says.
“There needs to be some sort of a recognition around, OK, this has a possibility for high payout. There is a risk associated with that. And what percentage of my portfolio does it make sense, given my total picture for me, to have allocated to something that has that kind of risk? That’s where investors can keep themselves safer. That’s the piece of the story that is missing.”
— with files from Reuters