In this article, part one of a two-part series, Rocco Taglioni describes the effects of market volatility on investor behaviour and the benefits of staying invested, diversified and balanced.

Tough markets are normal; it’s how we react that’s key. For many wise investors, market volatility is their friend because it can provide opportunity. Other investors, however, stay on the sidelines during periods of volatile markets. The challenges with this reaction are the issues of trying to time the markets, ongoing inertia and the resulting element of missing the upside. Without enough investment growth, many investors may not reach their financial and retirement goals.

Advisors can show investors what would have happened if they didn’t react emotionally to market fluctuations and instead followed the rules of engagement: staying invested, diversified and balanced. There is data and insight that you can share to show investors how they would be further ahead, especially when they consider:

  • Even with 30 years of ups and downs, global stocks have returned 9.3% annualized; that’s in spite of 3 bear markets with declines of as much as 51.7%.
  • Looking at the past 5 years, the value of the Dow Jones Industrial Average Index has increased 10.1% annually. Even though Canadian equities have been struggling, the average annual total return was 5.5% for the S&P/TSX Composite Index, for the 4 years ending December 31, 2014.
  • If a client invested $10,000 on January 3, 1995, and didn’t touch the money, it would be worth $65,453 on December 31, 2014, with a 9.85% annual return. If that client had taken the money out of the market and missed only the best 10 days of performance, it would be worth $32,665 — a dramatically different 6.1% annual return.1

Global stock market

When markets take a downturn and investors get nervous, they might make investment decisions they could regret. For example, some investors panicked during the 2008/2009 financial crisis and sold quality stocks when market values were down. Those equity values subsequently recovered and continued to push to record highs, leaving investors who had sold with “crystalized” losses and weaker portfolios.

Encouraging cautious investors to get in the game

There’s evidence that Canadians are keeping their money in this country — and in cash. According to the 2015 Investor Sentiment Report from Sun Life Global Investments:

  • respondents state only 12% of their portfolio is invested in foreign stocks, bonds and mutual funds, compared to 34% in Canadian stocks and stock mutual funds, and 13% in Canadian bonds and bond mutual funds,
  • only 16% say they plan to invest more in foreign assets in the next year, and
  • 25% of their assets are held in cash, on average.

How long can investors afford to remain on the sidelines? According to my colleague Sadiq S. Adatia, Chief Investment Officer, Sun Life Global Investments, the market volatility we’ve seen over the past years isn’t going to magically disappear any time soon. “Overall, we feel that volatility is here to stay and further upside in most equity and bond markets may be limited in the near term. However, the recent pullback has created opportunities that we feel may be worth pursuing — with patience.”

With Sadiq’s comments in mind, you can help clients weather market-volatility storms. Encourage them to work with you to make sure they’re invested in the right places and pursue the right strategies, including staying invested. That’s particularly important, since missing the best days can hurt.

When markets turn negative, our instincts often tell us to sell now and buy again later. That may seem logical, but how do you pick the right time to exit or re-enter the market? Because rallies can sometimes come in surges measured in days, not weeks, being out of the market for even a few days can cause lasting damage to portfolios.

Variety is the spice of life — and sound investment advice

Even in a world of complexity, sound well-known advice is appropriate. The best advice still involves helping clients understand the power of diversifying their investments by investing in a number of different asset classes, regions, industries and management styles. That way, clients can offset the risk that comes from being heavily invested in one or just a few of these categories. For example, too much emphasis on Canadian equities and cash can limit growth opportunities. As well, diversification brings the potential to generate more consistent returns.

To see the power of diversification in action, your clients might consider a simple balanced approach: stocks offering growth potential and bonds helping protect against losses in portfolios. It’s a market-tested strategy that proved itself yet again in the financial crisis. Strategically constructed portfolios, such as Sun Life Granite Managed Solutions, can provide the most efficient return potential for specific risk tolerances or income needs. During the downturn, a balanced approach did far better than a stocks-only strategy, demonstrating the diversification benefits of bonds.

During the rebound, the opposite occurred, with stock gains in the balanced approach more than off-setting falling bond prices. And while it did underperform stocks, the balanced strategy still delivered the positive returns with lower volatility that many investors are looking for.

Financial Crisis | Crisis Rebound

Resources to start wealth management conversations

Market volatility is normal, but many clients become nervous when they see their investments losing value. During this RRSP season, you can help them think long term and stay invested.

In part two of this series, we’ll take a look at retirement planning strategies around the themes of growth, income and protection.

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1 This data is for illustrative purposes only and does not represent the performance of any investment or group of investments. 20-year annualized returns are based on the S&P 500 Total Return Index. Past performance is not indicative of future returns. An individual cannot invest directly in an index.

Rocco Taglioni, Senior Vice-President, Head of Distribution, Individual Insurance and Wealth, is responsible for the overall leadership of Sun Life Financial’s distribution organizations across its Retail business in Canada. His role encompasses the leadership of the distribution company, as President Sun Life Financial Distributors Inc., as well as the Insurance and Wealth wholesaling sales organizations. Through the various leadership teams he oversees the development, direction, and execution of the Distribution strategies centered on wealth management, protection, retirement, and estate and financial planning.

Since joining Sun Life in 2004, Rocco has held various executive leadership roles, including Vice-President Business Development, Group Benefits; Head of Individual Wealth Management; Senior-Vice-President, Client Solutions; and most recently Senior Vice-President, Distribution and Marketing, Individual Insurance and Wealth. Throughout his tenure at Sun Life, Rocco has led various business strategies centered on building, transforming, and evolving organizations and teams to drive higher levels of performance and success.

Rocco has 36 years of experience in strategic leadership in the insurance and investment industries. He has served on and is a member of a number of boards. Rocco is currently President and Chair, Sun Life Financial Distributors (Canada) Inc. and is a member of the Sun Life Financial Investment Services (Canada) Inc. board. He is a member of various industry associations, including Advocis, GAMA Canada, the Canadian Pension and Benefits Institute, and the Association of Canadian Pension Management.

Rocco holds a Bachelor of Arts in Economics from York University.