When it comes to protecting your mental and physical health during a pandemic, it’s important to play it safe.
Can you say the same about your financial health?
The market fallout caused by the COVID-19 pandemic was swift and concerning to investors. At the start of the pandemic, U.S. markets experienced the fastest 30 per cent stock decline ever. Many investors who thought their portfolios were safe started to worry as investments dropped in value. While remaining cautiously optimistic that 2021 will bring a stable and sustained recovery, market volatility is always present. This can create a need for investors to asses their risk tolerance with their advisor on a regular basis.
“Warren Buffet once said that when the tide goes out we see who’s wearing shorts,” said Darren Devine, President of Devine and Associates Financial Services Inc. “What that means is that investors’ emotions come to the surface. Investors feel great when the markets are on the rise. When the markets go down as they did during COVID, we can see what their actual risk tolerance is.”
Devine says the sudden and rapid recovery helped ease investors’ fears when the markets dropped in March. Investors often push beyond what their true risk tolerance is during periods of solid economic growth. Unfortunately, that tolerance can quickly vanish if portfolios loose a large percent of their value.
“In a V-shaped recovery, if you’re back to par, it’s a good time to review your investments,” suggests Devine. “See how your investments performed and whether they stayed in line with the amount of risk you can withstand”.
While not everyone’s investments are connected to the market, those that do were down a significant amount of capital. Seeing a portfolio valued at $200,000 quickly drop to $140,000 is upsetting to any investor. Devine says determining your risk tolerance comes down to your age and timeframe for contributing to your investment portfolio.
“An investment strategy that’s good for a younger person may not be good for an older person,” said Devine. “For a 25-year-old who may have a high-risk investment portfolio, this isn’t a time to panic. You’re likely buying units at a discount as a result of the downturn in the market. On the other hand, if you’re 62, retiring at age 65, now may be the time to ask questions. If a market correction occurs, does a high risk portfolio make sense at this stage of your life?”
No matter how your investments faired during COVID, Devine says it’s important to find out your true risk tolerance. This helps you prepare for any future market unpredictability.
“Not always do we get the benefit of a sharp recovery so quickly,” he said. “Being back to a period of positive growth in six months is rare. There’s no script here, no playbook. It’s not a static equation. Next time it drops it may take five years to come back. Take the time now to assess your risk and adjust your portfolio accordingly.”
To get an assessment of your investments, contact Devine & Associates Financial Services Inc. at 519-780-1730.