Staying calm when markets are volatile is even more challenging for do-it-yourself (DIY) investors who don’t have an advisor to talk them out of panic selling.GETTY IMAGES
Some investors still wince when they recall the steep stock market selloff earlier this year, driven by fears around the impact of U.S. President Donald Trump’s initial tariff announcements.
Alan Green, head of exchange-traded funds (ETFs) for Dynamic Funds in Toronto, recalls convincing a good friend, who at the time was nervous about the downturn, not to sell his long-held investments.
“I said, ‘Look, this is a 20-year investment – you don’t need to get out.’ And it was a good thing he didn’t,” Mr. Green says, pointing out that the markets not only recovered but reached new highs in the following months.
It’s a textbook case of choosing your investment strategy and sticking with it, in good markets and bad, adjusting it when your life changes – not when the markets shift.
Staying calm when markets are volatile is even more challenging for do-it-yourself (DIY) investors who don’t have an advisor to talk them out of panic selling. It’s why advisors often recommend building a portfolio that allows you to sleep at night, especially when markets get rough.
It starts with goals and a plan
When building a portfolio from scratch, Mr. Green says investors need a goal – buying a house, funding a child’s education, preparing for retirement – and a time horizon for when they want to get there.
“And you need to stick to it. That, to me, is the most overlooked question. ‘What are you trying to do and how long do you have to do it?’”
Investors then need to consider their asset allocation based on risk tolerance and when they think they’ll need the money they’re investing.
The advice for younger investors is often to put more of their money in stocks, given their long-term growth potential, says Yuko Girard, a vice-president and portfolio manager with Scotiabank Global Asset Management in Toronto.
While equities may be riskier than bonds, Ms. Girard says young investors have more time to recover from market downturns, especially when saving for long-term goals such as retirement.
“If you have a longer time horizon, 70-per-cent equity is a good place to start. If you’re in your 40s, or you want to take a little less risk, 60 [per cent equity] is the basic rule,” she says, while also suggesting a mix of active and passive investment strategies.
“The broader the strategy, stick to passive because it’s cheaper and won’t likely make a huge difference,” she says. “The narrower you get with things like sectors, regions or strategies, go with active managers.”
Luka Marjanovic, managing director and head of CIBC Investor’s Edge in New York, says fixed income is a good asset to round out the non-stock portion of a portfolio, whether the split is 70/30, 60/40, or another mix based on the investor’s age, goals and risk tolerance.
For example, he suggests DIY investors pair some equity ETFs or mutual funds with a bond fund that includes a mix of short-, medium- and long-term bonds for broad diversification.
Mr. Marjanovic says investors can also diversify through a “core-and-explore” allocation strategy.
He says “core” refers to longer-term investments in stable blue-chip companies and sectors, such as financials and utilities, while “explore” often refers to riskier investments in high-growth stocks or other, more speculative options, such as a thematic ETF that invests in an emerging trend, such as AI or cryptocurrencies.
“You can have a core that’s set and then you can move around the edges with smaller and maybe more exotic positions, where if things do go wrong, they can’t hurt you too much, because that core is working toward your main goals.”
Mr. Green says core investments can include balanced ETFs or mutual funds that hold individual ETFs in a simplified pre-packaged solution, which he points out have become valuable tools for both novice and more experienced investors.
He says the explore, or what he calls “satellite” holdings, can be alternative asset classes, such as private equity, private debt and real estate, which tend not to be correlated with public markets.
“Some satellite holdings that are there to enhance returns and have a bit of a play with things you’re interested in,” he says.
Mr. Green says the strategy does not need to be complex and it should always be based on the investor’s goals. “[It’s] a lot easier than most people think. Take a simple strategy of balanced investing over the long term and try not to touch [your portfolio] too much.”