Investors may be feeling uncertain about whether now is the right time to make some changes, like switching from mutual funds and/or a financial advisor to low-cost ETFs and index funds using a robo advisor or an online brokerage.
On one hand, the market downturn presents an awesome opportunity to capitalize on buying stock “on sale.” On the other hand, you don’t want to panic-sell existing investments because they’re likely to rebound later, and it will probably mean taking a loss now. Also, waiting for the market to rebound from COVID-19 could mean buying stock at a higher price.
Should you make a switch or stay put until the market rebounds from COVID-19? Which to choose and how to choose? We’ve got you covered.
Resist the Temptation to Time the Market
To be clear, investors shouldn’t change their investment strategy based on market conditions. We know that investment risk means there’s a chance your portfolio can lose value in any given day, week, month, or even year. We also know, historically, that markets have twice as many ‘up’ days as they have ‘down’ days.
What we don’t know is in which order or sequence these events will occur. So that means staying the course and staying invested will give investors the best chance at capturing those up days and achieving a favourable outcome (i.e. making money). The moral of the story: resist the temptation to time the market — it isn’t an effective strategy. In fact, you may even stand to profit during a market downturn.
Evaluate Your Portfolio
We also know that investors are emotional and prone to market timing, performance chasing, panic-selling, and other bad behaviours that are hard-wired into our brains.
The past decade of strong returns has made us overconfident of our capacity for risk and led many investors to chase speculative returns from cryptocurrency, cannabis, and other fads. It has led us to invest short-term money that may have been better off in the safety of a GIC or high-interest savings account. And, it has fooled us into believing that investment fees don’t matter, as long as the performance is strong.
The first thing investors need to do is take a hard look at their existing investments and determine if they still make sense. In other words, do your investments match your risk tolerance, your time horizon, and provide you with proper diversification? Are you paying an advisor to actively beat the market, and, if so, how did their performance stack up?
For investors who may need to make a portfolio change, the rest of this post is for you.
Should You Change Your Investment Strategy?
Many investors find that a market downturn — like we’ve recently experienced during the coronavirus crisis — is an opportune time to change investment strategies. Maybe your advisor’s promise to ‘protect your downside’ didn’t pan out as your portfolio plunged in value (and might be a sign that it’s time to break up with your financial advisor). Perhaps your stock-picking prowess wasn’t as good as you’d hoped.
Whatever the catalyst, you need to know if now is the right time to make a switch. And, if it is, where to move your money and how to invest it going forward.
First of all, forget the notion of selling low and buying high. Changing investment strategies simply means moving your already invested money into either a more risk-appropriate investment or to one with a higher expected return (due to lower fees or broader diversification).
I went through this myself during the last oil price collapse in 2015. At the time, I held more than 20 Canadian dividend-paying stocks, and the handful that were in the energy sector got hammered and lost 30-50% of their value.
When I made the decision to switch to index investing, I had to sell all of my individual holdings, including the ones that were down in value. Most investors have the mindset to want to hold onto their losing investments until they recover. But I had to reframe it and think of my individual stock holdings as one large portfolio ($100,000 at the time). I was moving that $100,000 from 20 ‘risky’ individual Canadian individual stocks to a more diversified two-ETF solution that held many thousands of stocks around the globe.
So, you’ll want to think about your portfolio as a whole lump sum instead of a collection of individual parts. And you’ll want to move that lump sum to another platform, be it a robo advisor or a self-directed discount brokerage. All the while you’re going to remain invested – outside of potentially a day or two when you sell your existing holdings and set up your new portfolio.
DIY vs. Robo: Decide on the Platform
Are you a hands-on investor who wants to take control of your investments, slash your fees to the bone, and keep frequent tabs on your portfolio to make sure your asset allocation stays in-line with your original target mix?
Great! You’re a prime candidate to switch to a self-directed online brokerage. We’ve done the online broker comparison and feel that Questrade is the best choice for DIY investors. It offers every account type you can think of, from RRSPs, TFSAs, RESPs, LIRAs, margin accounts, and more – plus free ETF purchases. Plus, you’ll get 50 free trades when you sign up.
Another good choice is Wealthsimple Trade, which is a mobile-only platform that offers commission-free trading for stocks and ETFs. Wealthsimple Trade doesn’t have all the bells-and-whistles that Questrade has to offer, and its account types are currently limited to RRSPs, TFSAs, and non-registered accounts, but it’s a great platform for eliminating trading fees. Plus, you can take advantage of our exclusive promo offer: open a new Wealthsimple Trade account, and get a $10 cash bonus + $0 commission trades. All you have to do is deposit $100 and buy $100 worth of stock within the first 45 days.
Maybe you find the idea of DIY investing is a bit intimidating. In that case, you’ll want to take a long look at a robo advisor. Again, we’ve done the research for you in our comprehensive guide to Canada’s robo advisors and can tell you that Wealthsimple is the platform we recommend the most. Now is a great time to sign up because Wealthsimple is offering Young and Thrifty readers an exclusive deal: get a $75 cash bonus when you open and fund a new Wealthsimple Invest account with $1000 within 45 days.
With a robo advisor, you’ll get a hands-off experience where all you need to do is fund the account and contribute regularly. The robo advisor handles the rest, from setting up a portfolio of index ETFs, to automatically monitoring and rebalancing your investments.
Building Your Portfolio
Investors who’ve chosen the robo advisor path need not worry about this section. When you open an account with a robo advisor like Wealthsimple, you’ll answer some basic questions around your risk tolerance, experience, and investing time horizon. Based on those answers, your funds will be placed in a diversified portfolio of stock and bond ETFs.
For those who’ve chosen the DIY investing path, the investment choices are much more difficult. There are so many stocks, mutual funds, and ETFs to choose from that it’s enough to make your head spin. You can easily learn how to buy stocks, but to make things simple, here are a few tips for getting started:
- Focus on ETFs that passively track broad-based indexes such as the TSX or the S&P 500. Focus on building a diversified portfolio that includes Canada, the U.S., plus international and emerging markets. Don’t forget about bonds, which help smooth the ups-and-downs of your portfolio – especially important in these volatile times.
- Use the top seven ETFs for Canadian investors as the starting point for building your portfolio. Novice investors will also want to check out how to start investing online in Canada.
- Avoid individual stocks as a general rule, unless you simply cannot help scratching your stock-picking itch. In which case, you should limit individual stocks to a small portion (say 5%) of your portfolio.
- Avoid riskier ETFs that invest in specific sectors like oil & gas, cannabis, or biotech, or ones that trade in commodities and futures. Steer clear of any ETF that has “triple leveraged bull/bear” in its name.
It’s tempting to look at stocks or sectors that have been badly beaten up during the coronavirus crisis, but these investments are highly speculative and risky. They should not be the foundation on which your investment strategy is made.
The global pandemic caused global stock markets to crash more than 30% in one month – the fastest decline in history. Stocks have since largely rebounded, but plenty of economic uncertainty remains.
Investors may still be feeling angst about their portfolios. The ones who didn’t panic and stayed the course throughout April likely saw their portfolios recover most of their losses. Indeed, index investors know they should accept the ups-and-downs of the market and not abandon their strategy as economic or market conditions change.
But the latest crash also may have also exposed the flaws in our portfolios. Our allocation to stocks may have been too high after years of strong returns. Many more have strayed into speculative investments instead of sticking with core broad-based indexes. New investors might have put short-term money (like a down payment on a house) into the market expecting a quick profit. Still, others are paying too high fees for their managed portfolio of investments.
For those investors, now is as good a time as any to re-evaluate your portfolio and consider changing investment strategies.
Just remember that changing approaches does not mean market timing or selling low and buying high. You’re simply moving your already invested money into a potentially more risk-appropriate, lower cost, and globally diversified investment portfolio with a robo advisor or self-directed online brokerage.