Three Reminders to Start Another Year

After a difficult year, and as we look to the year ahead, here are three reminders to help keep perspective.

Volatility: Likely to persist

Periods of greater volatility tend to coincide with market drawdowns and 2022 was no exception (chart).* 

In 2023, we expect ongoing volatility as the central banks continue their tightening practices to rein in inflation. Rate hikes are intended to slow the economy, which may put downward pressure on earnings and lead to volatility. Downward volatility can be difficult, even for the best of us. Modern behavioural scientists suggest that we feel the pain of loss about twice as much as the pleasure of a similar-sized gain. It can cause undue stress or prompt poor investing decision making. During these times, consider focusing less on the financial news or checking in on portfolios. Leave the day-to-day focus on your investments to those who are here to manage them.

Markets will go down; This is normal

Part of investing involves accepting that the markets will go down from time to time. The good news is that, over longer periods, compounding average returns can lead to significant wealth. We often talk about average returns and it’s worth repeating that annual returns often do not fall close to this average. Consider the visual (below) that shows the wide dispersion of annual returns of the S&P/TSX Composite Index since 1981.

Annual returns are less than the long-term average of 6.7 percent (red line) in 19 out of 41 years. That’s almost one-half of the time. And, 29 percent of the time, annual returns were negative. In the short term, we can expect a wide range of outcomes, including negative performance

Equities continue to be one of the best asset classes to generate wealth

With increased market volatility and interest rates at levels not seen in decades, products like low-risk, guaranteed investment certificates may look appealing. While this may be a good opportunity for cash on the sidelines, if you’re investing for the long term, consider that equities continue to be one of the best asset classes in which to generate wealth and beat inflation over time, even in spite of the down years.