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Mirror, mirror – who’s the biggest reason for your investment’s fall?

June 21, 2018

Imagine a world where everything goes your way from Day One. Imagine if you never experienced uncertainty or failure, and never encountered obstacles or hardships.

Okay, now keep all of that where it belongs: in your imagination. Unfortunately, real life doesn’t work that way – especially not investing. Think about it. If financial markets went up in a straight line and the value of your investments gained steadily without ever declining, would you ever sell? You’d simply hold them and watch your wealth grow every single day.

Nice work if you can get it! It never happens because investments frequently rise and fall in value depending on economic conditions, geopolitical issues or any number of market events. Sure, when things are going well and your portfolio is growing, investing seems pretty easy.

What about when times get tough and markets start collapsing around you? Do you possess the conviction and confidence to stick with the investment portfolio that you and your advisor have carefully constructed to help you achieve your financial goals? Or, do you join the frenzied crowd and panic over short-term market volatility, even if it puts your long-term financial plan in jeopardy?

The $30,000 blunder: A cautionary tale

To illustrate how your approach to investing can have a significant impact on your wealth, here’s a sad (but true!) story of an EdgePoint client who made a critical $30,000 mistake. For confidentiality’s sake we’ll call her Jane Doe, although you could pretty much substitute any name – maybe even your own, since her story is fairly common among investors.

Jane Doe started investing with us in October 2009. After her initial $15,000 investment she made three subsequent purchases, which put her total invested capital at $33,000. In September 2011, just at the tail end of a particularly rough period of performance for the Portfolio she’d invested in, she sold $12,000 of her investment.

It turns out that Jane Doe lost some dough because she redeemed when markets were down and missed out on the opportunity over the next six years to compound the growth of that $12,000 redemption. In actual dollar terms, she gave up approximately $30,000 ($82,690 minus $52,700) as a result of one simple yet common mistake.

Sound familiar? It’s safe to assume all of us have been tempted to behave like Jane Doe did, with many of us giving in to that temptation. In our minds we know that markets have shown to rebound over time and continue moving higher despite occasional bumps in the road. However, emotions often get the best of us and we act irrationally in times of extreme uncertainty.

Transaction dateTransactionAmount

While we don’t know for sure why Jane Doe decided to sell in 2011, chances are she got nervous about the decline in her portfolio’s value and did so out of fear. We’ll also assume she kept the money she withdrew “under her mattress”, in cash. Who hasn’t walked in her shoes before and mightily stubbed their toe when volatility heightened and markets became downright scary?

Fast-forward to May 2018 and we can see how her investment decision played out. By that time, markets had recovered nicely and her investment bounced back as well. The remaining $21,000 of her invested capital grew by over $52,000 to a healthy $73,700.

Now, what if she’d stayed the course and kept the entire $33,000 invested? Her investment would’ve ballooned to more than $115,690. That’s almost $83,000 worth of gains.

Jane Doe's activityCapital investedEnding market value (May 31, 2018)Growth of capital

Don’t zig or zag – a straight line is the fastest way to your goal

The moral of this story is to remain resolute in the face of short-term market turmoil. Don’t sell into panic if you still believe in the long-term strength of your investments. In fact, if you’re courageous enough – and it definitely takes courage – the best thing to do can be to add to your investments when markets are in disarray and everyone seems to be doing the opposite. You could be buying at very attractive (i.e., “oversold”) valuations and be in a position to benefit greatly as markets recover.

When the inevitable market declines occur, your advisor can help you stay calm and keep you focused on your longer-term financial objectives. Over the years we’ve clearly seen that the most satisfied EdgePoint clients are long-term EdgePoint clients committed to disciplined investing.

If you need more help fighting natural human instincts so you can be a successful long-term investor, we invite you to read – and, more importantly, abide by – our 10 investor affirmations. These straightforward (but challenging to execute on) affirmations may keep you firmly on the path to financial success for years to come.