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opinion

History shows that deviating from a well-considered, long-term investment plan is rarely a good idea. Investors should avoid making rash decisions in moments such as the one we are currently experiencing.

Over recent days, most trading sessions have seen moves greater than +/-1% in U.S. markets, a level of volatility that is likely to continue. The VIX index, sometimes referred to as the stock market’s ‘fear gauge,’ has recently climbed well above its long-term average. While it may be tempting to sell risk assets when the ‘fear gauge’ is high, the chart below illustrates that some of the best one-year returns were during periods of heightened volatility.

The Globe and Mail

But don’t try to time a flight to cash when the fear gauge is high, and buy back equities when the environment improves.

We looked at what would happen if an investor sold out of the S&P 500 daily whenever the VIX surpassed 33.5 (around its current level) and then bought back in whenever the ‘fear gauge’ dipped back below that level. Since 1991, they would have underperformed a continually invested strategy by 2.3% a year.

Periods of heightened fear have often been better for stock market investing than one might think. Investors should resist the urge to hit the panic button and instead stick to their financial plan.

Here’s a related thought to keep in mind.

Geopolitical events can result in devastating consequences (as we see in Ukraine). Still, the impact on corporate revenues and profits is generally far less significant than Wall Street analysts sometimes predict. Markets have time and again proven to be resilient, bouncing back from geopolitical events quite quickly (as shown in the chart below).

The Globe and Mail

Bear markets (falls of more than 20%) are much more likely to be caused by financial events than geopolitical ones. It does not mean that we ignore such events, but we are cautious about assuming today’s headlines will impact corporate performance 12 months down the road.

The best defense against these types of market events in the long term is a strategically diversified portfolio. A portfolio from global equities, to private infrastructure and real estate, and everything in between, is worthy of consideration.

Duane Ledgister is vice-president of Connor Clark & Lunn Private Capital