As markets waver, energy prices dive and viruses and terrorists threaten us, Michael Katchen has a message for do-it-yourself investors: Keep calm and carry on.
In volatile and uncertain times – and we seem to be in these times right now according to business and news reports – that means not doing much to alter one's portfolio at all, says Mr. Katchen, founder and chief executive officer of Wealthsimple, a new online "robo-adviser" investor service.
Like other robo-services, Mr. Katchen's company, launched just four weeks ago, lets do-it-yourselfers build portfolios and have them automatically rebalanced. But he thinks the most important advice he can give right now to investors is person-to-person: Don't panic if times seem bad, leave your investments alone and think about something else.
"Inactivity may be the best course," he says. "Your desire to do something is an emotional need, not necessarily a financial requirement."
Mr. Katchen is fond of the saying, "Don't just do something, stand there," attributed to figures ranging from Dwight Eisenhower to Clint Eastwood to the White Rabbit in Lewis Carroll's Alice in Wonderland. "Have the conviction to stick to your plan in the best and worst of times," he says. "Investors who chase performance or run away from losses are doomed."
Calling DIYers who bail in bad times "doomed" may be a bit extreme, but there is data to back up Mr. Katchen's contention. In 2009, $150-billion flowed out of equity mutual funds even as the S&P/TSX composite index came roaring back from the 2008 crash.
"You can see what emotion does to investors. You have to remind yourself constantly that the key to investing successfully is discipline," Mr. Katchen says, noting the money kept flowing out of equities even after the market rebound was clearly under way.
One way to ride out an economic storm is to deploy the principles of dollar cost averaging. It's a simple and widespread investment technique that was popularized in The Wealthy Barber, the 1980s bestseller by David Chilton (now one of the Dragons on CBC TV's Dragons' Den).
Dollar cost averaging is far from foolproof, but it is a technique that can help take the emotion out of investing in a roller-coaster economy. An investor who uses the concept will invest a fixed amount of a particular investment, say, an exchange-traded fund, on a regular schedule, sticking to the schedule even as the investment goes up and down.
This is in contrast to parking a larger amount in the same investment all at once. With dollar cost averaging, the investor purchases more of the investment when prices are low, and less when they are high.
The advantage, in addition to helping DIYers retain their stomach linings, is that by dollar cost averaging the investor is not risking a large fortune all at once. But a 2012 study by researchers working for Vanguard Investment found that dollar cost averaging doesn't always work as well as rolling the dice with a lump sum.
Vanguard looked at data from the United States, Britain and Australia, comparing what happens over a year to a $1-million lump sum investment. They compared the results with an investment of the same amount spread over 12 months.
The lump sum came ahead two-thirds of the time for portfolios made up of 60 per cent equities and 40 per cent bonds.
It's still worth considering a dollar-cost-averaging approach if you can't live with the risk of a huge plunge in your investments, says adviser Dan Bortolotti of PWL Capital Ltd.
"People don't make decisions based only on the odds of success, but also on the consequences of failure," he says. "You have a five in six chance of winning in Russian roulette, but you won't find many takers."
He notes that in the worst 5 per cent of Vanguard's U.S. results, a hypothetical investor who put $1-million in at once could have ended up losing $200,000 over 10 years.
For any DIYer who gets sick just thinking about this kind of result, dollar cost averaging can make sense. "But stick to a strict timetable," Mr. Bortolotti says.
Even more important for DIYers, Mr. Katchen says, is to go back and review the reasons why they bought particular investments in the first place. "What was your expected outcome from the purchase? Is that still intact? If you bought TD Bank stock because it's a big bank and pays a lot of dividends, do you really care about the share price?" he asks.
DIYers should also be wary of seeing a market correction as an opportunity to scoop up stocks at bargain basement prices, Mr. Katchen adds. It can be fun, but the vast majority of investors are not effective stock pickers. Best to keep emotions in check.