What goes down will go up, or The longer you stay invested, the higher the returns

Yuri Bilinsky, New Pathway – Ukrainian News.

For many Canadians, the journey on the road to wealth has lately become increasingly bumpy and frustrating. For their investing needs, many people turn mostly to GICs and real estate. Neither of these two investment vehicles seem to be as good options currently, given that GIC rates have, for the last few years, been very low, while real estate in many Canadian regions has now become so expensive while mortgage rules have become more difficult.

During his webinar “Investing in volatile markets”, Michael Zienchuk, Manager of Ukrainian Credit Union’s Wealth Strategies Group, discussed the ways out of this investment conundrum.

Ironically, Zienchuk started the webinar with listing the major events that have been putting investors off the stock markets over the past 35 years. Starting with the Black Monday on October 19, 1987, when the market dropped by 26 per cent in one day, to the recent COVID-19-related calamity when the markets dropped by 35 per cent over six weeks, there have been numerous “shock events” that have caused markets to drop substantially, scarring investor psychology.

Chart 1

Economies and stock markets go in cycles and after downward periods always come periods of growth. During periods of economic and stock market expansion, everybody begins to feel great and look to invest more. Problems for many investors start during downward stages of economic cycles when human psychology begins to be problematic. When stock prices drop by 20 per cent or 30 per cent investors become concerned and want to get out of stocks. In a nutshell, a lot of people invest the most near the top of a business cycle and then panic the most at the bottom of a cycle – forgetting that markets, like economies, go in cycles.

Chart 2

For most long-term investors, the method, which leads to prosperity, is to stay invested. The net effect of all the events in the economy and stock market is positive over time: the trend in values goes from the bottom left to the upper right on Chart 3. On the other hand, ‘safe’ investments, like GICs, may bring lower than inflation returns, eroding one’s purchasing power. As Zienchuk put it, “if you truly want to make a large gain over inflation and get your money to work the most efficiently and effectively, you’ve got to be invested in the markets, irrespective of the crazy events that occur”.

Chart 3

As Chart 3 shows, stock markets are volatile. This means that it is extremely difficult to time the tops and bottoms of the markets. Chart 4 demonstrates what happens when you miss some of the best trading days in a cycle. If you were fully invested and stayed invested from January 1986 through to December 2019, a $10,000 investment would grow to $142,636. If you missed the ten best trading days within that period, your investment would only grow six-fold instead of fourteen-fold. Missing the best 60 days your money would be cut in half. So, it’s not about timing the market, getting out at the top and getting in at the bottom, it’s time in the market because it’s extremely difficult to try and play the game of getting in and out all the time.

Chart 4

The key feature of current financial markets is abundance of liquidity, which central banks across the globe are providing to support economies that are heading into recession caused by the coronavirus. All the quantitative easing events, which have occurred after 2008, have caused growth in stock markets.

Chart 5

With very low interest rates and ample liquidity in the economy there is a chance to see a big run-up in inflation, which could erode the value of fixed income instruments. Given that 1-year GICs now return sub-2 per cent, potentially higher inflation means that you are actually losing money on the investment. This makes equities more attractive.

Inflation has its benefits for those invested in certain stocks – it drives commodity prices higher. This has already been manifested by the price of gold, which has recently gone from about $1,200 an ounce to about $1,700 an ounce. All commodities and hard assets – real estate, oil, gas, base metals – begin to increase in value as interest rates go down and inflation goes up. This may benefit many Canadian stocks going forward.

After the steep decline in mid-February to late March, when North American markets dropped by more than 35 per cent, we have seen at least a 50 per cent recovery off the bottom. Zienchuk noted that it is extremely difficult to see where things will be going in the future. But what goes up does come down and what does go down absolutely does go up. One of the major reasons for that is the pressure of money. Every year more and more people join the workforce, they generate an income and purchase all kinds of goods. They also save and buy insurance. That money has to go to work and it goes into the securities market. The pressure of money will continuously drive up asset values. One of the axioms of investment states that the longer you stay invested, the higher the potential returns.

Michael Zienchuk is a Chartered Investment Manager (CIM) and holds an MBA from the Richard Ivey School of Business, University of Western Ontario. He is the manager of the UCU Wealth Strategies Team and is an Investment Advisor with Credential Securities. UCU Wealth Strategies Team offers mutual funds and other securities through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.

With files from “Investing in volatile markets” presentation