What is an investor’s tolerance for risks? This question is an important part of the first conversation with an adviser – the answer will greatly influence the type of investments that fit the investor’s needs. But what are some of the behavioural and economic factors behind Canadians’ attitude towards risk-taking? A recent Investor Education Fund survey has some of the answers:
60% of Canadians invest based on careful analysis
23% of Canadians invest based on both analysis and gut feelings
17% of Canadians invest based on gut feelings
40% of Canadians regretted an investment based on emotion once or twice
12% of Canadians regretted an investment based on emotion once or twice every few years
4% of Canadians regretted an investment based on emotion many times
When markets get rocky, it’s not uncommon for investors to be tempted to sell out and wait for the tide to turn.
But that can be a mistake, says Rick Headrick, president of Sun Life Global Investments, a Toronto-based mutual fund manager that is a member of the Sun Life Financial group.
When they sell out, investors eventually face the difficult question of when to buy back in again, Mr. Headrick explains. And those who miss the turn can lose out because market rallies often come in surges that are measured in days not weeks, meaning that being out of the market – even for a short period – can cause lasting damage to the value of a portfolio.
He advises staying invested no matter what happens on global stock markets. Like many of his colleagues in the investment sector, he is telling investors to anticipate another year of weak growth, low investment returns and heightened volatility in global financial markets. “I think it is going to continue to be a rocky year in the markets generally, with some brighter spots,” he says.
When short-term outlooks are negative, some investors feel more comfortable moving to the sidelines. But data published by Sun Life supports Mr. Headrick’s view that staying invested pays off.
The research shows that people who invested in January 1985 and held on until August 2015 – through the Black Monday market crash (September-December 1987), the tech meltdown (April 2000-October 2005) and the financial crisis (November 2007-March 2009) – made a robust nine per cent average annualized return on their investment. That takes into account three bear market declines of as much as 51.7 per cent.
Aside from staying invested when markets turn negative, Mr. Headrick believes it is important to work with an adviser to build a plan that takes into account your life, health and wealth needs, as opposed to just your investment needs. People who are aiming for long-term investment success should establish a financial plan early in life, he says, adding that he’s already started this discussion with his daughter, who is in grade 10.
Mr. Headrick adds that investors can minimize portfolio volatility by sitting down with an adviser to build an asset mix that matches their risk tolerance and investment horizon and include uncorrelated asset classes, such as stocks and bonds, so that some go up while others are going down. “Stocks offer growth potential while bonds tend to protect against losses and dampen volatility,” he notes.
The strong performance of the funds managed by Sun Life Global Investments, especially during periods of extreme volatility, speak to the effectiveness of a long-term view and the culture of risk management the organization has developed since its inception, says Mr. Headrick.
“I would say risk management is in our DNA,” he adds. “We have a strong focus on capital protection while at the same time ensuring that our clients participate in the upside of the markets.”
Sun Life Global Investments, with $12.3-billion in client assets under management and a portfolio of 64 mutual funds, takes a disciplined research-based approach with a view to long-term performance. In addition to investments managed by its in-house portfolio management team, Sun Life Advisory also offers a diverse line-up of mutual funds through sub-advisory relationships with firms such as MFS, BlackRock Asset Management Canada Ltd., Dynamic Funds, Sentry Investments, Schroders and others.