Don’t panic in a volatile stock market

Derek, I noticed the markets dropped quickly in October. Can you help me understand what’s going on and what an investor should do? As many investors have noticed, the markets have been very volatile the past few weeks.

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Derek, I noticed the markets dropped quickly in October. Can you help me understand what’s going on and what an investor should do?

As many investors have noticed, the markets have been very volatile the past few weeks. Canada has been hit especially hard, but all markets around the world are undergoing a pullback. Here are some comments and suggestions to help put things into perspective.

Stocks were very volatile around the world and we saw many days of declining markets. Most major indexes experienced their worst decline in over two years amid mounting concerns about global economic growth and a corresponding drop in the price of oil.

And while investors could be focusing on good news such as business fundamentals, recent job growth re-acceleration, GDP growth and low interest rates, they are instead engulfed in a crisis of confidence brought on by Europe and its slumping economy. Other recent events around the world have also served to heighten investor anxiety, including the Russian-Ukraine issue, Middle East unrest, Hong Kong-China, Ebola, ISIS and the U.S. Federal Reserve taking away its financial stimulant and threatening to raise rates in 2015.

As mentioned above, oil is also part of the bad news. Crude oil prices are down 27 per cent since reaching a high of $106 in June. This has been a swift decline brought on by a price war between Saudi Arabia and Iran selling oil to China, along with slower global demand growth and rising oil production in the U.S. and elsewhere.

However, there is a silver lining. Consumers filling their oil tanks for the winter heating season will be happier than they were this time last year, which means more money in the pockets of the average consumer to either invest, pay down debt, or put back into the economy.

In Canada, employment and growth gains have stalled but a recovering U.S. economy, coupled with a strengthening U.S. dollar, should help our economy and provide opportunities for Canadian investors seeking foreign diversification.

So with all of this in mind, what should investors do?

First, follow experienced investors and take advantage of sale prices. As Warren Buffett says: “If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

This could be a great time for dollar-cost averaging into the market at sale prices. You are at a long-term advantage if you invest today in funds that are buying shares of great companies at low prices.

Second, be a long-term investor. History has always shown that stock markets provide the strongest returns over the long term. Here’s a chance to let history prove itself again.

Third, be patient.

Although volatile markets are not positive for everybody, they will always come to an end.

Finally, no one likes to see their investments decline in value. This being said, we will experience times in the market, such as we have seen lately, that will be unnerving and test our patience. After all, most of us have lived through two devastating crashes in 2001 and again in 2008.

Those who panic and get out of the market hurt themselves in two ways. One, they turn temporary paper losses into permanent actual losses; and two, they prevent their portfolio from participating in the market gains that will inevitably occur.

One thing is certain: confidence will gradually be restored. This always happens. Then, market opportunities will once again be greater than market risks.

Before making any decisions in your investment portfolio, be sure to consult with a qualified investor adviser.

Happy investing!

Derek Fuchs is a wealth adviser with ScotiaMcLeod in Red Deer, and a certified financial planner, financial management adviser and a fellow of the Canadian Securities Institute. He can be contacted at derek.fuchs@scotiamcleod.com.

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