COLUMN: Ask the Money Lady – Market risk

Dear Money Lady Readers: I was speaking at a Toronto event a few months ago to about 600+ seniors and was chatting with a lovely lady after the event that was telling me how much she had lost in the stock market during COVID. I wanted to caution all my reader. Now that we’re on the cusp of another recession – please do not pull out your investments when the market falls.

Suffice it to say that you need to create a portfolio that you can live with during up-markets and downturns. You should never live or die by your portfolio, and if you are in that situation, you need to get into something less risky. Let’s take a little risk test together.

Say you have $10,000 in cash and we are sitting at a table together. Your $10,000, in all its hundred dollar bill glory is put in a nice big pile in the middle of the table. Okay, now let’s play the market. I have a quarter: heads you get to keep your money; tails you lose it. Now I know this is an extreme example, but sometimes that’s how it feels when you’re watching your investments, right?

Let’s try this again, if you lost 20 percent of your investment portfolio, would you be okay with that? YES?

What if your portfolio was $1,000,000. A 20 percent loss is $200,000. Are you still comfortable with this possibility?

Most people say they can handle the ups and downs of the market, but research shows that we tend to hold on to losing positions far too long in the hope of avoiding errors or suffering a loss. We like to think that we are rational in our decisions, but most evidence suggest that investors act irrationally and have frequent errors in judgement. Some of us will even take a hands-off approach to stock picks and hold on to securities that are familiar or ones to which we have an emotional attachment.

If you think you can predict the outcome of a stock, wake up. The reality is that you cannot. Becoming overconfident creates unwarranted faith in your stock picks and becoming too nervous makes you sell-out when you clearly should ride out the trend.

Not everyone acts the same with risk, especially seniors that no longer have an “earning run-way” to make up for losses. It is best to have your investments managed by a portfolio manager or licensed investment advisor with a firm that you can trust. Make sure you understand the products you are choosing with your advisor and always invest to the point that you can sleep at night. It is so important for you to create your own competitive advantage and to choose investment products that match your future goals and risk tolerance. Don’t worry so much about the gossiping and bad news stories on the TV. You cannot be a profit-chasing gambler in the stock market, and if it sounds too good to be true, you know it probably is.

Christine Ibbotson is a Canadian finance writer, radio host & YouTuber. For more advice check out her YouTube channel: ASK THE MONEY LADY – Your Canadian Finance Coach.