In February I wrote about the urge investors can have to sell investments when they aren’t performing well. I think this topic deserves a special focus this month, bringing recent data forward to demonstrate the impact of emotionally charged financial decisions.
The message isn’t new - you probably hear it each time you meet your financial advisor. Warren Buffett says it best in his “Owner’s Manual.” He writes…“Do not think of yourself as merely owning a piece of paper whose price wiggles around daily and that is a candidate for sale when some economic or political event makes you nervous. We hope you instead visualize yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family.”
Markets are not efficient. They rise higher than they should, then they drop lower than they should due to human emotion. Looking below you will see that the Canadian market represented by the S&P/TSX index generated a loss of over 8% in 2015, whereas other markets looked much better.
|Equity Indexes (Canadian $)||2015 Calendar Year Return||1st Quarter 2016 |
|S&P/TSX ||-8.3% ||3.72% |
|MSCI EAFE ||18.95% ||-9.68% |
|S&P 500||21.59% ||-7.21% |
|MSCI World ||18.89% ||-7.21%|
The reason the industry suggests that you stay the course when investments drop is partly because fluctuation is expected. The amount of fluctuation however, should be tailored to suit you and your situation. I will draw on another quote from the “Owner’s Manual” … “If we have good long-term expectations, short-term price changes are meaningless for us except to the extent they offer us an opportunity to increase our ownership at an attractive price.”
What happened when Canadian’s were faced with this fluctuation in 2015?
The information below illustrates that on average investors did not hold, they did not buy - they sold. Their money went to areas that looked better.
|Bottom Selling Category||$ Billions||Top Selling Category||$ Billions|
|Canadian Dividend & Income Equity ||-6.728 ||Global Neutral Balanced ||+8.068 |
|Canadian Neutral Balanced ||-6.549 ||Global Equity ||+5.514 |
|Canadian Focused Equity ||-3.670 ||Global Equity Balanced ||+3.761|