How to survive a market downturn – lessons to make investing less intimidating

Canada Life - Oct 19, 2023
Diversification can help you weather market volatility because spreading investments across asset classes can help reduce risk
person sitting at their computer and looking at their phone

Concerned about where stock markets are headed? When it comes to investing your money, your main goal is likely to grow and preserve your wealth. Investing in equities has historically provided a good long-term rate of return. But it’s easy to forget that when market volatility arises.

When major market events cause the stock market to fluctuate, your immediate reaction may be to sell your investments and sit on the sidelines. But past market crashes and financial events have provided great learnings that can help you weather potential market downturns.

Among these learnings, the best approach is to diversify your investment portfolio and stay invested. There's a long list of market crashes and events that have caused the stock market to fluctuate. In this article, you'll find examples of recent events, and takeaways from each. 

Tighter financial conditions 

Markets experienced a robust recovery after the COVID-19 pandemic, but equity and fixed income markets continue to face uncertainty today.

Geopolitical tensions, fears of a recession, turmoil in U.S. regional banks and high inflation have led central banks to raise interest rates. While the U.S. Fed has signaled an end to its rate-hiking cycle – providing some solace to the markets – this has created a more challenging environment for stocks and corporate bonds. On the bright side, market volatility is creating an opportunity for active investors to find good value in the market in fundamentally solid, well-operated companies that can still perform well amid a high-inflation environment.

The return of market volatility has reconfirmed the importance of holding a well-diversified portfolio, which can help minimize losses in a market downturn. 

COVID-19 pandemic 

In March 2020, as COVID-19 infections were accelerating globally, countries around the world instituted lockdowns, effectively shutting down their economies. The anticipation of a global recession, and the uncertainty of an unknown virus spreading exponentially, led markets to dip sharply. The MSCI World index, a gauge of global stocks, dropped 34% from its Feb. 19 peak to its March 23 trough.

The speed of the stock market downturn and subsequent recovery distinguishes the COVID-19 market event from past market crashes. In the United States, the S&P 500 recovered to its February 2020 peak in less than six months, the fastest-ever rebound for a major bear market (when a market experiences prolonged price declines).

Three major factors contributed to the sharp bounce back after the pandemic: 

  • Aggressive government interventions, including support packages for businesses and individuals 
  • The relative resilience of financial infrastructure 
  • A virtual world where technology companies benefited 

2008 Global Financial Crisis 

In 2008, banks and investment firms were over-exposed to mortgages granted to individuals with poor credit scores (known as subprime mortgages). While many institutions were not directly involved in the issuing of this debt, they invested in an array of these subprime mortgages.

When these subprime mortgages began to default and the housing market collapsed, banks and investment firms were exposed to significant losses. This threatened the global financial system and made access to short-term liquidity (the ease with which an asset, or security, can be converted into ready cash without affecting its market price) difficult. This in turn forced governments and authorities to intervene with support packages to rescue financial institutions. Poor regulation and supervision of the financial sector contributed to the sharp market decline. 

Out of major market events come major learnings 

First, diversification is key. It’s a basic principle that supports long-term success and helps to weather volatility. It’s important to ensure your investments are diversified. Nobody can predict the future - if a major recession or crisis is coming, or if tighter financial conditions are here to stay - so a well-diversified portfolio is important.

Another wisely agreed upon lesson – stick with your plan and stay invested.

The COVID-19 crash and rebound was the fastest bear market recovery in history which highlighted the importance of staying invested and not selling investments during traumatic market events. Those who continued to stay invested during the pandemic benefited from the recovery of the market. 

Potential solutions for you 

Maybe you’re approaching retirement and are feeling nervous about the impact of market volatility on your portfolio. As you start to draw income from your investments, you want to ensure your hard-earned savings last. Or perhaps you’re saving for your kids’ education and are looking for a smoother investment experience and a sense of control as you save to help your kids reach their potential.

Managed solutions can provide you with a well-diversified turnkey solution to invest according to your financial goals and objectives. There are a variety of managed solutions programs available. From solutions aimed at mitigating risk, to those that support specific goals, there’s a portfolio for you. Reach out, and we can run through your options.  

What’s next?

We live in a complex world with rising uncertainty and ever-changing markets. I can help you: 

  • Understand the impact of current market conditions on your investments 
  • Review your short and long term goals and discuss whether you need to make any changes to your investment portfolio to keep you on track 
  • Build a financial plan to better weather market volatility 

Call or email me, and let’s talk about how to help you through today’s market conditions.