Market volatility can be challenging for investors. Regularly investing in a diversified basket of exchange-traded funds can help your portfolio weather the fluctuations of the market and also take emotion out of your investing decisions.AFP/Getty Images
Choosing diversified ETFs and contributing regularly can prevent you from making rash choices
Investors who look at the news these days might be forgiven if they’re tempted to crawl under the covers rather than confront the constantly volatile economy. Exchange-traded funds (ETFs) can help investors avoid making impulsive moves based on hype or fear mongering that may or may not pan out, taking the emotion out of building a strong and steady portfolio built for the long haul, experts say.
“Fear and greed are the kickers that can upend an investor’s plans, and ETFs can help minimize both,” says Darren Coleman, senior portfolio manager with Portage Wealth of Raymond James in Oakville, Ont.
“All of us are prone to making irrational emotional decisions – it’s the same in investing as when you switch lines at the supermarket because you think the next one over will be faster. If you use ETFs the way they’re designed to be used, you can avoid these decisions and stay on track more easily,” he says.
Sticking to your plan means investing in ETFs in a steady, methodical way, rather than buying and selling them continually, Mr. Coleman says.
“You have to remember that even though an ETF can be bought and sold like a stock, it’s not a stock. ETFs are a way to buy into a strategic allocation of underlying securities that gives you exposure to the market in a diversified, easy, cost-efficient way. They’re not investments you should be moving around, constantly buying and selling,” he explains.
“Having an all-in-one solution keeps you invested and avoids decisions that maybe you shouldn’t make,” says Chris McHaney, executive vice-president and head of investment management and strategy at Global X Investments Canada Inc.
ETFs provide diversity, with some following a market index and others offering a basket of assets that can include stocks, bonds and currencies. They’re transparent, usually publishing their holdings every day and they’re easy to buy on an exchange, says Global X, part of Seoul-based Mirae Asset Financial Group, with more than US$800-billion in assets under management.
ETFs have evolved and become more sophisticated since the first one was introduced on the Toronto Stock Exchange in 1990.
“The first ETFs that came out were extremely passive; they mimicked a market index such as the S&P 500, so you basically got what was on the market – for better or worse,” says Paul Shelestowsky, investment advisor with Meridian Credit Union and Aviso Wealth in Niagara-on-the-Lake, Ont.
“Now there are many specialized ETFs, for example, funds that hold only companies that pay good dividends, or ones that have a particular balance between stocks and bonds. So if you don’t want the broad market you can buy an ETF that still benefits from passive management but has some elements of active management in that the managers pick holdings that meet a few specific criteria,” Mr. Shelestowsky explains.
It’s generally a good idea for ETF investors to make regular contributions, which build up the portfolio, experts agree.
“The whole concept of dollar-cost averaging makes sense,” says Mr. Coleman. “This is an investment strategy where you invest a fixed amount of money at regular intervals, say every month.
“Not only does it help you mathematically – because you have more money in your portfolio – it also helps regulate your investor behaviour. If you’re doing the same thing every month you’ll be less prone to emotional swings when the market goes up or down, which it does,” he adds.
Mr. Coleman says this reduces the stress of trying to time the market – which experts say can’t be done. Over time, it enables investors to buy ETFs (or other holdings) when the market is down and the purchases are cheaper.
“It’s the same principle as stocking up on cans of tuna or rolls of toilet paper when they’re on sale. With investments, people sometimes get emotional and buy in the wrong order – buying when prices are up and selling when they’re down,” he says.
“Remember, the biggest factor in successful investing is not necessarily the performance of the investment itself – it’s the investor’s performance [how the investor reacts to market fluctuations]. If you buy and sell emotionally you’ll be prone to making bad decisions,” he says.
“There’s solid history to show that dollar-cost averaging works,” adds Mr. Shelestowsky. “When the markets crashed in 2008, you’d be better off within two years if you left your money in and kept investing than if you sold everything when things hit bottom,” he says.
In these volatile times, where a tweet or wayward comment from a politician can send markets either soaring or diving, the best action to take is to be consistent, Mr. Coleman says. “You’re best to stick to your plan. There’s lots of behavioural science showing that we sabotage ourselves, unless we’re disciplined.”
Contributing regularly to your investment accounts every month or quarter “helps take some of the emotion out of investing,” Mr. McHaney says. “Remember the long-term focus.”
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