The impact of staying invested during market turmoil

Posted on January 4, 2018 in:

The decision to stay with your plan is often better than timing when to sell and buy.

Staying the course during market volatility is often difficult for many investors. Some choose to move to cash investments, while others try to time the market. Unfortunately, these investors are often buying high and selling low—and miss the rallies that follow the challenging periods.

So, does staying the course pay off?

In the chart below, we look at a hypothetical balanced portfolio of 60% equities and 40% fixed income faced with three alternatives as of Sept. 30, 2008, two weeks after the collapse of Lehman Brothers Holdings Inc. (Lehman Brothers).

The starting point for the $100,000 (CAD) hypothetical portfolio is October 31, 2007, the market peak prior to the collapse of U.S. brokerage Lehman Brothers, the largest bankruptcy in U.S. history*, a key event leading to the 2008 financial crisis. The choices as of September 30, 2008 are:

OPTION #1: Stay invested, and make no changes.

OPTION #2: Move to 100% cash, represented by the FTSE TMX Canada 91 Day T-Bill Index, and remain in cash.

OPTION #3: Move to 100% Canada government bonds, represented by the FTSE TMX Canada Federal Bond Index, on September 30, 2008, and remain in Canada government bonds.

As the chart shows, when sticking with a 60/40 portfolio, investors recovered a greater percentage of their lost value—and at a faster rate—than going to cash or treasuries.


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