On behalf of Sun Life, welcome, and thank you for joining. For the next 18 minutes we present to you, Staying the course. From starting a family to planning for retirement – it can be scary investing your hard-earned money at any stage of life. Especially when there are talks of market volatility, rising interest rates, geopolitical risks and a pandemic in the news. In such times, it is completely natural to have apprehensions and fears around investing.
Volatility refers to the sometimes wild, upward and downward swings in stock prices or markets caused by events over which you have little or no control. Risk, on the other hand, is a personal matter: It's how much financial uncertainty you, personally, can tolerate without losing sleep at night. It can feel frustrating, but fluctuations are a normal part of a long-term investment journey. Volatility can influence your perception of risk and motivate you to take actions that can hurt your investment returns. There are different types of risk to consider including market risk, interest rate risk, inflation risk, exchange risk and business risk. Let's explore each of these. The risk you will hear the most about is market risk. This the possibility of experiencing losses due to factors that affect the overall performance of the financial markets. Interest rate risk is the risk that a change in interest rates will cause the value of bonds or other investments to fluctuate. Interest rates impact most investments. The price of bonds generally moves in the opposite direction of interest rates. As interest rates increase, bond prices drop and vice versa. Rising interest rates also dampen economic growth and may impact stocks and real estate while lower rates make borrowing for businesses and consumers easier. This encourages spending and investment which can boost stock prices. Inflation risk is often referred to as a head wind as you try to build wealth. It can erode purchasing power unless your Rate of Return is equal to or better than inflation rates. For example, if you are retiring in 10 years and inflation is around 3%, $1,000 today would be the equivalent of $1,344 in 10 years. Therefore, your investments must earn at least 3% just to break even. In the last year, inflation has become a hot topic as we have seen some of the highest inflation rates since the 1980s. The average inflation rate in Canada over the past 10 years, was around 2% but has increased dramatically in 2022. Understanding how your investment returns measure against inflation is important in your overall investment approach. Foreign exchange risk, also known as exchange rate risk, is also a concern at this is the risk that a business' financial performance or financial position will be impacted by changes in the exchange rates between currencies. Finally, there is business risk. Business risk is the exposure a company or organization has, to factors that will lower its profits or lead it to fail. Anything that threatens a company's ability to achieve its financial goals is considered a business risk. You can't separate volatility and risk, but you can manage their impact on your investments.
When you have a long-term investment horizon, you can take the fear out of risk, as historically the markets have bounced back and recovered. Many different events have sparked volatility in the past. Think of Black Monday in 1987, the Tech Meltdown of 2000, the Financial Crisis from 2007-2009 or even the first Covid-19 Lockdowns in 2020. In all these cases, you'll see a cycle. Investors are always tempted to sell during times of volatility but it's generally not a good idea for two main reasons. First, because they're locking in their loss from selling at a lower value. Second, they're likely to miss the market rebound. While it's hard to predict when the recovery happens, selling in a downturn means you could miss some of the best gains. When large market forces are at play, it's normal to want to do something to take control. But potentially the best thing you can do is stay invested and keep your long-term plan in mind.
Market volatility is not your enemy, but it is important to understand the emotions involved with the highs and lows you are experiencing. Human emotion drives financial markets as much or more, than market fundamentals. As your investments grow, your confidence grows. And while you don't know exactly where the top of the market is going to be, there is a feeling of euphoria when returns are favorable. This is also the point of maximum potential risk for your portfolio. Conversely, as your investments lose value, your confidence diminishes, and you begin to feel nervous. And while you don't know exactly where the bottom of the market is going to be, there is a feeling of despondency when returns are unfavorable. This is also the point of maximum potential opportunity. A diversified portfolio can help protect you from the extreme highs and lows of market volatility, which in turn can help prevent you from feeling extreme emotions as your portfolio expands and contracts. The truth is wise investors see market volatility as an opportunity to buy quality investments at a discount. Many will take advantage of market volatility using dollar-cost averaging simply by making regular contributions.
Don't worry if this sounds complex. It's actually very easy. Dollar-cost averaging "just happens" when you set up automatic investments into a fund-based plan, such as your workplace plan. Small investments are made regularly over the course of the year. Your money buys more units when the markets are low. When markets increase again, you'll have a much better return on that money. Your whole portfolio may be worth more as a result. And the more your investment portfolio is worth, the better your retirement lifestyle will be – just what you're looking for.
Diversification is a strategy that spreads your risk over different types of investments. You balance both the overall risk and your potential returns. By diversifying, you also help protect your savings from the market's ups and downs. Different types of investments, such as stocks and bonds, often move in different directions. You can diversify by Asset Class as well as by levels of risk within investment types, such as choosing investments in different regions or with different management styles. If you hold just one type of investment and it performs badly, your portfolio value would decrease substantially. But if you hold many different investments, the theory is that it's unlikely all your investments will perform poorly at the same time. The return you get on the investments that perform well could balance out some of the decrease on those that don't do as well. Diversification is a great way to ensure your portfolio doesn't react strongly to market volatility. There's no predicting how well your investments will perform or how steady your returns will be. That's why it's important to diversify your portfolio. The best way to start is holding investments in different asset classes. The most common types of asset classes are cash and equivalents; fixed income such as bonds or bond funds; AND Equities such as stocks or equity funds. Depending upon your age and tolerance for risk you will want to build a portfolio of investments from each of these asset classes.
Depending upon your age and tolerance for risk you will want to build a portfolio of investments from each of these asset classes. If you are just beginning your career and you're saving for retirement, with plenty of time on your side before you're likely to withdraw your money, you may wish to consider allocating more of your portfolio to equities. For example, you might have a split of 60%-80% equities OR (stocks) to 20- 40% fixed income. As you get closer to retirement, you may want the comfort of a more conservative portfolio and less risk. For example, you may eventually have a split of only 40% equities and 60% fixed income. This is sensible even if it means giving up some of the potential for higher growth in exchange for lower, more steady returns. But keep in mind, that you don’t have to focus your allocation solely on retirement but should consider your life span as well. Modifying your portfolio over time by increasing the fixed income allocation and decreasing the equity allocation may effectively reduce your portfolio's volatility as you approach your objective.
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- "Just beginning your career?
- You can increase your portfolio's long-term investment risk and set yourself up for higher potential returns."
- "Midway through your career?
- You can make most of your time with a slight increase in the growth portion of your portfolio."
- "Getting close to retirement?
- Align your portfolio with your retirement income goals.
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Along with diversifying by selecting different types of asset classes, you can also diversify within an investment type. This means choosing investments in the same category that could react differently to the same event, such as an interest-rate spike or a political crisis. By diversifying by region and management style, you balance your overall investment volatility. Losses in one area may be offset by gains in another. Diversifying by region means investing not only in Canadian funds, but also in foreign funds. This increases your chances of growth while managing risk. You benefit from the strength of different markets, while reducing the risks of having all your investments tied to just one region. Diversifying outside of Canada gives you access to industries under-represented in Canada, such as Information Technology. The Canadian market can be volatile as it relies heavily on three sectors: Financials, energy and resources. You can also choose to mix up management styles. Managers apply varying investment styles when choosing underlying stocks for their funds. Different styles perform well in different economic cycles and environments. No single management style consistently outperforms the rest. There are several management styles to consider. Some of the foundational management styles include: Active fund managers, who choose funds using analytical research, forecasts and their own judgment. Passive or index fund managers, who buy and sell assets of a fund to match the characteristics of an index such as the S&P/TSX Composite. This may provide you with broad diversification. Growth fund managers, who invest in companies experiencing a rapid growth in profits. They offer higher returns but greater risk. And Value fund managers, who buy stocks of companies they believe are undervalued by the market. Some funds act like a diversified portfolio and hold a combination of equities and fixed income. Asset allocation funds such as a balanced fund or a Target date fund are good examples as they will typically hold stocks, bonds and money market investments. Asset Allocation funds hold specific percentages of different stocks, bonds or cash and rebalance periodically to ensure these percentages don't change. It's important to keep sight of your long-term goals, and diversification will help you achieve those targets. You may want to speak with a qualified financial professional about what level of risk is appropriate for you and how to diversify your portfolio.
Remember, while things may look scary at times, staying the course may be the best course of action. Look at the impact of missing only the best 5 days over a 35-year period. This represents a $32,000 loss over that period. The most likely result of selling after a downturn is missing some of the best gains during a recovery as it's challenging if not impossible to predict the best time to re-enter the market. It may also help to not check the markets everyday.
<On the slide> A bar chart based on an initial $10,000 investment made on January 1, 1985:
- STAYING INVESTED: $232,572
- Missing best 5 days: $200,377
- Missing best 10 days: $177,768
- Missing best 30 days: $110,044
- Missing best 50 days: $52,938
This graph shows how missing the best days during a recovery can mean losing out on big gains. Consider $10,000 invested on January 1, 1985. <End slide>
This may sound clichéd during a tough market, but it's still true. Advice is important. It's hard to be an investor and watch your portfolio when there are market downturns. But advisors are trained to work in both positive and negative markets. They can offer valuable advice in helping clients stay diversified, and focused on goals, timelines and risk tolerance. It's important for clients to stay in touch. Similarly, as portfolio managers, advisors are trained to manage risk and seek opportunities in good times and bad. In partnership, advisors are committed to helping you get through this.
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You decide which to focus on:
- Days
- Decades
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Having a plan for your investments and staying the course will help to reduce your fear and anxiety throughout market downturns. Other factors outside market conditions can also cause concerns about your financial security. Having a broader financial plan can help protect your investments and reach your goals while also ensuring your loved ones are looked after in the event of disability, critical illness, or the sudden passing of a family member. Here are some things to consider when considering your broader financial plan. Always have an emergency fund. Even if it's just $100, setting cash aside for unexpected events can ease your stress. Do you have insurance that matches your financial goals? Life, disability and critical illness insurance can protect income and savings in the event you pass away or suffer from a serious event. With life insurance, the lifestyle of your loved ones doesn't have to change dramatically. Critical and disability insurance provides funds for treatment or replaces income if you're unable to work. Think of insurance like the shield of your financial plan. You may also consider health insurance to save money on medical expenses. If buying a home is in your plan, homeowner's insurance could help provide the protection you need. High-interest debt can eat away at your savings, but you can tackle it in small ways. Eliminating a debt payment frees money that would normally be used on interest. You can use it to save or pay bigger debts. Consider saving your tax refund or year-end bonus. If you are to receive a tax refund or bonus from your employer, saving even a portion of that money is a good way to boost your savings, pay down a debt, or top-up your emergency fund. Put it in your RRSP and it may help you get a tax refund next year. Finally, having a will or estate plan can ease the burden on those you care about so their lifestyle can carry on upon your passing. You take the difficult decisions away from them and ensure the government or courts don't make decisions for you. A living will can also be important for medical care, should you be unable to communicate your wishes.
It's hard to be an investor and watch your portfolio when there are market downturns. It may feel uncertain at times but there will be a recovery. Taking the first few steps is key to ensuring you can manage market volatility whether you are a new investor or someone close to retirement. When you walk away today you should review your financial goals and priorities. Understanding your time horizon for when you will need your money is an important consideration during market downturns. Most importantly, stay the course and you'll see the benefits. If you still aren't sure and need some help, don't be afraid to seek out advice. Advisors are trained to work in both positive and negative markets.
Thank you for listening to the information provided. We hope you have found this recording helpful.
<On the slide> The information provided is of a general nature and can not be construed as personal financial or legal advice. Neither Sun Life or its affiliates guarantees the accuracy or completeness of any such information. This information should not be acted on without obtaining counsel from your professional advisors, including a lawyer, notary, tax professional, or financial advisor (registered as Financial Security Advisors in Quebec) as may be applicable to your individual situation.
Group Retirement Services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life group of companies. <End slide>