**Today’s post is from my friend Markus Muhs, a CFP, CIM, Investment Advisor, and Portfolio Manager with Canaccord Genuity Wealth Management. I’ve known Markus for years and he’s one of the first people help me become financial literate and I’m thrilled to be sharing a guest post from him.
First a disclaimer: I’m a financial advisor. I work in the industry, and people pay me for financial planning services and managing their investments. I don’t want this post to come off as an advertorial for my business nor to dissuade people from “do-it-yourself” investing. This isn’t a “you need me and should think twice before managing your own investments” post, but rather consider it free advice to fill what I perceive might be a gap in the collective knowledge of DIY investors.
I work with a lot of “Millennial” aged clients, as well as follow many of the discussion boards, blogs, podcasts, and Reddit on personal finance. I consider myself a Millennial myself (depending on what the age cut-off is, I might have to go with Xennial) and by my estimation, this generation seems to have the best head on its shoulders when it comes to smart investing and financial planning.
My experience with most of the under-40 crowd has been investors proficient with spreadsheets and knowledgeable about indexing, ETFs, asset allocation, and fees. Unlike older generations they’re completely unimpressed – even outright cynical – with stock-picking and active fund management. My industry is one where a lot of the older investment advisors sell themselves on their stock-picking prowess or sell active mutual funds and hedge funds on their past track records, and their older client-base eats it all up.
For myself, stock-picking never factored into my business, and I’ve always marketed myself as a financial planner first, portfolio manager second. Having a portfolio of good investments maybe factors 20% into your long-term success, but the other 80% comes from strategy (financial planning!) and – above all else – discipline over emotions. This is a topic I want to cover with this blog post.
Are you ready for a bear market?
I’m afraid of the next bear market. Not because of the inevitable “drawdown” (the decline from market peak to trough) on our portfolios, but because of what the average Millennial investor is going to do; how they’re going to react.
Many investors in the under-40 crowd have never really experienced a real decline in the markets, like the 50ish% drawdown in 2008/2009. If we were investing prior to 2008, then we were just starting out and what we had invested probably wasn’t a 6-figure portfolio, thus we haven’t emotionally experienced seeing tens of thousands of dollars wiped off our account balances. Many in the under-30 crowd didn’t even experience the 20% drawdown in the summer of 2011.
If your investing experience only started post-2012 then you haven’t experienced a full blown bear market and don’t know how you’re going to react.
Yes, it’s easy to look at history and see that even if you invested all your money in an S&P 500 ETF at the market peak in October of 2007 and simply stood pat and kept reinvesting your dividends you would have doubled your original investment by now. Yes, it’s easy to see the long-term benefit of dollar cost averaging into the markets through thick or thin. Yes, it’s easy to look at a long-term graph and see how completely inconsequential (a tiny blip) “Black Monday” was in 1987 (a more than 20% drawdown in one day!). You can tell yourself “I will never make the mistake of being scared out of the markets”.
Obviously, you know that historically most stock markets have trended upward over the long-term, and a portfolio diversified across many markets has seen a fairly steady rise over the long-term. One of the prophets of behavioural investing, Nick Murray, once said “a permanent loss in a well-diversified stock portfolio is a human creation, of which the market itself is incapable”. Indeed 100% of the people who ever lost money investing in stocks did so because they made stupid decisions, like selling low, buying into bubbles (cough-crypto-cough) or generally buying long-term investments when the goals for their money weren’t long-term.
Historically it’s crystal-clear, and you’re telling yourself “next bear market I’m going to back up the truck and buy”, but you have to have really been there in 2008/2009, and have had a significant amount invested (at much higher prices!) to know what a bear market really feels like. Things were so apocalyptic-feeling, one often wondered if we’d end up reverting to using canned food or seashells as currency. If you’d been investing for the prior 5 to 10 years, you lost ALL of your investment returns to date, and then some. In early 2009 the S&P500 and TSX Composite returned to 1996 levels! The news media absolutely battered us with scary headlines, with no end in sight.
Anyone can be affected
Even I made a mistake with my own investments; not that I sold anything, but when I started my TFSA in Jan 2009, I didn’t follow my long-term investing plan, or make the best use of the permanent tax shelter, instead just investing the money into a bond fund. Thankfully, with corporate bonds so beaten up, it still made a double digit return for the year, but my point is that making mistakes during bear markets can be as simple as that, or as simple as abandoning a monthly contribution plan out of fear.
Okay, I mentioned that Millennials generally have good investing heads on their shoulders, and I believe that many will not fall victim to their emotions during the next (inevitable) bear market, but I couldn’t help but notice this headline: Betterment and Wealthfront websites crash during market bloodbath from the week of February 5th this year when markets dipped a perfectly normal 10% (historically has happened at least once per year on average). I don’t think that robo-advisor servers crashed because investors were anxious to make purchases during that brief one-week fire sale.
The “couch potato portfolio” is a great concept and a pretty much fail-safe way to grow your wealth efficiently over the long-term, if you stick with it. Robo-advisors add the benefit of helping investors connect the dots between their portfolio and their goals, and generally keeping them on the path toward their long-term goals. It’ll all be for nothing though if you let your emotions screw up your strategy along the way. Saving 1% in management fees each year for 30 years won’t mean much if during those 30 years you make just one fatal error that sets you behind 30%.
You might say that’ll never be you, but the statistics prove otherwise. Countless studies prove that the average investor underperforms their own investments over the long-term. Why? Because on average we make stupid investment decisions… constantly. We eagerly increase our allocation to risk during bull markets, but avoid risk during bears; really the opposite of what we should be doing and what regular rebalancing and a dollar cost averaging plan otherwise achieve.
Tips to keep your finances on track
- Investing success depends more on investor behavior than it does on finding good investments or having low fees.
- Whatever your investment strategy is, write it down. Whenever you buy an investment, write in a journal why you bought it and what your long-term plan is for that investment in terms of when/why you would sell (this is actually how many portfolio managers operate). Keep that journal in a safe place and refer back to it whenever you have doubts.
- Ignore the noisemedia. Tune it out completely. They’re not there to help you in your research, only scare you and make money off of ads. Here’s an admission: as an investment advisor myself, I actually do not have any of the cable business news channels on my home cable package. Stick to personal finance blogs and good books.
Markus Muhs, CFP®, CIM® (www.muhs.ca) is a Portfolio Manager at Canaccord Genuity Wealth Management, located in Edmonton, Alberta. He provides comprehensive financial planning and wealth management to families with assets over $300,000 across Alberta, British Columbia, and Ontario. Markus alternatively provides fee-for-service (fee-only) financial planning to non asset-based clients.