Unnerved by market turmoil, investors tend to turn skittish – is it time to sell?
These are the wrong times to follow your gut, says Kathryn Del Greco, a vice-president and investment adviser at TD Waterhouse.
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"Emotion can lead to poor and expensive decisions," says Ms. Del Greco, who works in Toronto's financial district. Time and again, she has seen investors caught up in what TD Asset Management calls the "emotional investing cycle" – buying into euphoric markets when prices are near their peaks, selling during downturns when prices have fallen, and missing out on gains when markets rebound.
It defies logic, she says, stressing that investment advisers have a crucial role to play in providing "calm, rational guidance" – investors, after all, shouldn't make hasty sell decisions based on what will most likely turn out to be short-term fluctuations.
Buying investments is easy, points out Adrian Mastracci, portfolio manager at KCM Wealth Management Inc. in Vancouver.
"The selling part of the decision is the gut-wrenching one – often full of fears and second guesses: What if it goes up after I sell? Should I hang on just a while longer? Will there be a turnaround in the cards? Am I making the right move?"
A prudent investor will regard selling "as a normal portfolio function, not a dreaded exercise" in a challenging market, Mr. Mastracci says.
Among the good reasons to sell is to maintain a balanced, well-diversified portfolio, in which all major business sectors are represented, Ms. Del Greco says. Weightings can change and a portfolio become unbalanced as economic conditions fluctuate.
Another good reason to sell is to pursue a better investment. On the fixed-income side, "you might make a change by selling some government bonds in order to reinvest the proceeds in corporate bonds," which she says are offering better rates of return these days.
In addition, despite the plunge in oil prices, quality companies still can be found in the energy sector, Mr. Mastracci says. "You're going to say to yourself, 'I might buy some on sale right now,' then stand back and hold for a while because it is probably going to go down lower."
Other valid reasons to sell, Mr. Mastracci says, include "investing fundamentals change, valuation is no longer reasonable, your profit target is reached, your asset mix range is exceeded, you make a mistake selecting the investment, you need the cash, tax-loss selling makes sense, the price drops below your comfort level."
Regina-based financial adviser Dwight Kosior of Dwight Kosior Financial tells investors that if they know what they own, why they own it and have a process for managing their investments over time, it takes much of the drama out of the sell decision, he says.
"You can revisit [a holding], you can see if it's still solid, and from there you can make a judgment," Mr. Kosior says.
Rather than panic and make a knee-jerk decision, investors should watch how their holdings are affected – if at all – by the broader factors that are driving market fluctuations, Ms. Del Greco says.
"A reason you would want to look at selling that company would be an indication that the business conditions are deteriorating, such as a material miss on their earnings," she says. "In the quarterly conference call, look for terminology like 'unsettling' or 'unclear,' language that tells you things are going to be a little bit choppy."
A dividend cut "would be a very important warning," she notes.
On the other hand, the company may have made a nice profit, "and there's absolutely nothing wrong, when you have made good gains in the business, to sell part of the position to take your original investment out and reinvest in another opportunity," she says.
As a nervous novice investor eight years ago, Krystal Yee used to check her portfolio twice a day "and kind of freak out over any sort of dip in the market."
"Now I don't really worry about it any more. I stick to my game plan, which is long-term investing," says Ms. Yee, a Vancouver marketer and graphic designer in her early 30s. She holds some Toronto-Dominion Bank mutual funds, the Vanguard FTSE Canadian All-Cap exchange-traded fund and two individual stocks – Tata Motors Ltd. and Liquor Stores N.A. Ltd. She is considering adding more stocks, but has no intention of selling anything at this point.
"I don't plan on retiring for 25 years," says Ms. Yee, who writes about everything from home ownership, credit card options and the high cost of parking in downtown Vancouver in her personal-finance blog, Give Me Back My Five Bucks.
"A lot can happen in 25 years, ups and downs," she says. "But I feel if I just keep investing every month, as I have been, and follow the strategy I have laid out for myself, I will be just fine."
How they reacted
In a 2014 survey by Ontario's Investor Education Fund, one-third of Canadian investors said they had, at some point, lost 20 per cent of their holdings in one year. Here is what they did after:
51 per cent: Took no action and stayed the course.
36 per cent: Fled to financial safety, either for a short time or permanently
22 per cent: Fired their adviser or hired a new one.
15 per cent: Cut their personal spending.
13 per cent: Invested more.