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Investment Goals: The Long & Short of it

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March 18, 2019
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I nvestors dread volatile markets and, too often, their response is to jump out of investments when the market goes down and attempt to jump back in when it goes up. But it’s a historical fact that markets will always fluctuate and the price of any stock or equity mutual fund is bound to be somewhat volatile in the short-term. The one proven approach for taking away much of your investment risk is simply this: time in the market. Study after study has proven that time in the market delivers much better returns than trying to time the market. Here are some recent findings in support of a long-term investment strategy.

Many of the strongest market returns occur in the periods immediately following sharp declines in equity markets. Since 1950, following the worst 12-month periods of performance on the S&P/TSX, the market has made solid gains just 12 months later with only one exception. And within five years, the markets were up significantly – meeting and exceeding long-term return expectations.*

History has shown that economic recoveries following recessions are typically both strong and durable. In fact, periods of expansion that came on the heels of downturns averaged 57 months, or close to five years. After 1960, the average period of expansion following a recession was even longer at 71 months, or close to six years.**

Although negative returns in the short-term are relatively frequent, the possibility of receiving a positive return greatly increases as the investment term lengthens. For example, between 1960 and 2015 staying invested in the market (S&P/TSX) for a year resulted in a positive return in 74.7% of the one-year periods, while staying invested for 15 years resulted in a positive return of 100% of the time.**

In any one-year period, the returns of the S&P/TSX Composite Index have been as high as 86.9% and as low as -39.2%, a range of over 126%. However, when investors diversify their holdings and invest for the long term, this volatility decreases significantly. For example, a “moderate” portfolio invested for five years would have experienced a range of average annual returns from -5% to +28%, and if invested for 20 years, from +8% to +15% (S&P/TSX 1970-2015 – range of returns before taxes).*

So, as these findings once more prove: Staying invested ensures you are always capitalizing on the upside of the market and reducing the impact of short-term market volatility. Most importantly, the possibility of receiving positive returns greatly increases as your investment term lengthens. Of course, having a properly diversified portfolio with the right mix of investments that matches your tolerance for risk is also key to achieving your long-term investment goals. Your professional advisor can help you do that within the right overall financial plan for you.

BY JEFF FINCH, CERTIFIED FINANCIAL PLANNER

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