Emotions in investing
The humanitarian crises taking lives and garnering headlines are heart-wrenching—particularly for Canadians who have family and friends in the affected regions. More broadly, no one knows for sure how these crises will affect global economies, access to resources and financial markets. It’s understandable that investors are scared and making investment decisions based on their fear. Some people are selling their equities and leaving the markets. As an advisor, it’s my job to help take the emotion out of investing.
We know from previous wars, terrorist attacks, pandemics and other terrible events that people, governments and markets are resilient, and can even become stronger than they were before. This happened after 9/11, the global financial crisis and the global COVID-19 pandemic. The historical evidence suggests that the best thing investors can do when the world experiences a crisis is to separate feelings about the tragedy from the facts about the businesses you’re invested in and look for buying opportunities.
Impact of global crises on investments
The impact of wars and other traumatic events on the markets tend to be relatively short-lived. That’s because unlike fiscal policy—such as raising interest rates—the events themselves are not “economic” in nature.
For example, if war breaks out in an oil-producing country, will that affect the price of oil? Theoretically, it shouldn’t, because other, larger producers can offset any lost supply from the war-torn country.
But, as we know, perception can be more powerful than reality when it comes to the stock market. The initial, automatic reaction could be a spike in oil prices—and then prices should adjust with time.
What is a Canadian investor to do?
So, what do you do as an investor in Canada? Not an awful lot. As investment advisors, we get paid to grow people’s wealth. When markets sell off for reasons that are more temporary than related to economics and performance, it’s important to take emotion out of decision-making and not go into panic mode about your investments.
Markets may dip, but they don’t usually collapse. It’s possible your portfolio’s value may drop for a period of time. In the past, after a crisis has ended—and regardless of the outcome—the markets have regained stability, and investment returns have bounced back.
A crisis investment strategy
My best advice in the face of a world crisis: Stay calm, take a deep breath and focus on the fundamentals. Keep your risk profile front and centre, and think about where you want to put your money. My approach is to be sector agnostic and look for good value wherever I can find it.
Allan Small
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