Sudden Drops in a Portfolio
Unfortunately, I know this all too well!
In 2008, I decided to take control of my own RRSP, remove it from the Union’s fund and invest it at Odlum Brown. My advisor was new to the area and a recommendation of a friend. I like to use recommendations. This situation, financial stuff, even more so.
Here’s how the story goes. I was taking my sweet time to actually commit to investing the money on the stock market. My advisor, reached out and suggested some things to invest in. Some of the investment suggestions were great, some I thought were not so great. But he’s the professional. Some of the stocks I purchased were, Starbucks, Hewlett Packard and Nokia. (Yes, the Nokia cell phone company from Europe).
The prices seemed decent enough so I had him pull the trigger. (SBX $18.50, HPX $35.65 & Nokia $38.75 – Just giving everyone a baseline on the value of the invests to give you the landscape) As some of you will know, the market crashed hard in 2008 about 1.5 months after I invested. Oh boy. Going from memory, SBX dropped to $6.25/share, HPQ $12.98/share and Nokia $3.45/share. Yeah it hurt. Over 50% of my portfolio valuation was lost. Starbucks rebounded and I sold at $18.75 a share. Not a great return but a decent return. Both HPQ and Nokia have yet to bounce back. Nokia may never.
This isn’t the moral of the story. The moral of my sharing this story is that not all investments will win. But on average you can do better if you are patient. My knee jerk reaction to the losses was to sell Starbucks at a small gain and reinvest it elsewhere. I did based on the advice of my advisor.
What happened to Starbucks stock in the long run? It’s trading at $58ish a share. I could have tripled my investment over the life of the stock. There’s also the idea of buying more as it goes down so you average out your costs. There’s a ton of different investment strategies you can take. The point is this. 2008 was a rare situation. If I would have just relaxed and stayed course, I would have just been fine. But since I responded to the loses from a knee jerk reaction and not a long term strategy perspective, I lost out on potential wins.
Three take aways from this, trust your gut. I didn’t like nokia, I like Apple. But instead I gambled that the European cell phone marker would break into the market. I didn’t believe it would happen and it didn’t. Also, ask me what phone I am using. Second, play the long game. Historically, most stocks bounce back. Third, find a financial advisor that is trustworthy. If you can trust them you’ll sleep better. BUT REMEMBER, they are human. Mistakes may happen. As is the case with most things in life. But if you found a trustworthy level headed advisor, then you found someone who will take a deep breath, re-evaluate your strategy and help you move forward.
I also found my friends Rhys Martell’s article on the subject title Sudden Drops. This made some sense to me. Hopefully it helps you.
Very few people like to see their investment portfolio drop in value. We all want the wonderful long-term returns that can be gained from investing, but very few of us enjoy the rough patches that inevitably pop-up along the way.
So how do we get the good without taking the bad?
Let me assure you—it’s impossible. Some may be able to fluke from time to time but no one can consistently predict the future. Just ask a weatherman. The simple fact is, markets will do what they will do and they don’t ask for, nor wait for, anyone’s permission to do it.
But let me also assure you that the rough patches pass. In fact, every single time that North American equity markets have dropped, they’ve not only come back, but they’ve surpassed their previous highs—every single time in recorded history. Volatility is normal.
Now I realize you’ve heard all that before. But when your portfolio is down it’s still only about as comforting as a wet towel. I get that. And the truth is, it’s perfectly normal to feel anxiety when markets swing. Perfectly.
In fact, during one of the most recent downward market swings I just happened to be on a flight to Alabama for a speaking engagement. I was thinking about how my clients might be reacting when, right then, the plane hit some serious turbulence.
Now I’m not sure what you do when you hit turbulence, but I always do the exact same thing. I look for the flight attendants and I watch their facial expressions. If they’re cool, then I’m cool. After all, they do this every day so if it isn’t phasing them, then I’m not going to bother losing my mind about it.
However, if I see them buckling up in a panic and praying between sobs, then it’s very likely that I’m going to fall apart. Thankfully, that’s never happened.
Anyway, in that moment, it struck me how similar turbulence is to market volatility. No one likes it. It’s never fun. And though the person beside us looks like they are about to throw-up and is swearing they will never fly again, it’s just turbulence. It’s normal. Just ask the flight attendants. It happens all the time. And it’ll pass.
And unfortunately, the only way to avoid turbulence is to not fly. But then we’ll never get where we want to go. At least, not in a reasonable amount of time.
Same with market volatility. No one enjoys it. But it’s a normal part of investing. And unfortunately, the only way to avoid it is to put your money in a bank account, a GIC, or under your mattress. Of course, if we do that we’ll never get where we want to go. At least, not in a reasonable amount of time.
Rhys Martell, BA, EPC
Rhys Martell is an independent financial advisor and runs a private practice out of Abbotsford, BC.