Don't let your emotions rule

The Emotions Cycle graph

In recent months, you have doubtlessly run the full gamut of emotions over your investment portfolio. We are currently in the throes of a very volatile period, with substantive fluctuations in prices and rates over brief intervals. However, staying the course on the strategy you developed with your advisor should allow you to weather the storm without undue concern.

That being said, such major ups and downs in your portfolio may not seem normal. You might even feel anxious and discouraged, as demonstrated in the investment emotion cycle (see opposite Emotions Cycle graph). Those feelings must not be allowed to highjack your investments. Over the long run, well-diversified portfolios generate sound returns.

Effects of risk over time on a balanced portfolio

This graph shows the best, average and worst returns of a balanced portfolio for presented periods, since 30 years. The balanced portfolio shown is made of 25% canadian equities (S&P/TSX index), 30% global equities (MSCI world index) and 45% bonds (DEX universe bond index).

The importance of staying the course

Variation of three benchmark portfolios (balanced: 45% fixed income, 55% equities; growth: 25% fixed income, 75% equities; equity: 10% fixed income, 90% equities) compared to a 5-year GIC (3.60% as of March 2003 and 3.15% as of March 2008) from March 2002 to May 2008.

Manage your emotions

Several recent studies have shown that emotions can have a major impact on investor decision making. Fear, in particular, often clouds the judgment. This is absolutely normal.

However, individuals who choose to adopt a long-term investment strategy almost always obtain better returns than people who use the market timing strategy. The important thing is not when to invest in the market, but the duration of the investment and the respect of your investor profile, as shown by the following graph.