As the second month of the year has wrapped up, we have seen the continuation of the reddit army and the FOMO (fear of missing out) trade, the ongoing effect of the pandemic and its interaction with economies and financial markets, and the appearance of interest rate risk in both equity and fixed income markets. *Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index based on end-of-day data for the Total Return Index as at market close February 26th, 2021 REVIEW Volatility was present in the bond markets and spilled over to equity markets as yields have started rising due to the prospect of an economic boom with the belief that pent-up demand will be unlocked as restrictions loosen. In addition, strong growth expectations also come inflation expectations. Central banks have committed to extended periods of low rates, however, high inflation may force their hands to raise rates in tandem. FOMO Trading Understanding investor psychology can be a very power tool in your investing arsenal to keep your risk within your acceptable levels and to avoid following the herd in engaging in activities such as speculating on meme stocks. We all have a bias to regret aversion bias which can lead us to purchasing certain stocks, simply because we fear we will regret not having that exposure if it were to shoot up in value. When these instances present themselves, it is important to take a step back and think about the basics. When evaluating opportunities, first consider the risk-return trade off. If the opportunity looks too good to be true, it is likely due to the risk associated with the opportunity. High return potential is typically associated with higher risk. Another important element is to think long-term; this is because fundamentals will dominate in the long-term whereas in the short-term there can be bouts of irrational exuberance. If taking a higher risk make sense in the long run, and you can afford the higher swings, then it might fit in your portfolio. But if we have already set our risk tolerance and are within it, then there is often no need to take added risks – especially when we look at the long-term picture. Final Thoughts The economic outlook remains positive as the vaccination roll out continues globally and as restrictions are lifted and as fiscal stimulus programs continue. We continue to believe that if you stick to the basics, automate your contributions, hold a diversified portfolio and rebalance strategically you will be on the right track to reach your financial goals. A simple, rules-based approach helps us to avoid the biases we are susceptible to. We have built our portfolio management process on this fundamental idea – control what you can (costs and process) and then stick to the plan. Those who do, will reach their financial goals, one step at a time.
As the first month of 2021 comes to a close, we look back on an eventful one. President Biden took office, rioting took place at the Capitol, wild swings have taken place in select securities and as per the new normal the pandemic continues to take center stage as we monitor the pace of vaccinations and daily cases. *Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index based on end-of-day data for the Total Return Index as at market close January 29th, 2021. REVIEW Followers of the financial news will have seen headlines of a handful of stocks that have shot up in value astronomically as retail investors were placing active bets against institutional investors causing a “short squeeze” for those securities. The hype for these stocks has come primarily from online forums rather than business fundamentals, and although the action receives plenty of coverage in the news, it is important to note that there are significant risks carried with speculating on non-fundamental and isolated events. Digital currencies have also been gaining in popularity and have been receiving greater coverage as institutional investors are allocating capital to these assets. Digital currencies are very interesting as they are uncorrelated to other financial markets and could provide portfolios with diversification benefits as a result. However, like the stocks receiving media attention cryptocurrencies are also subject to wild swings and are not as easily available to purchase compared to other asset classes. As this asset class matures, it may become a more viable option for a greater number of investors. President Biden was inaugurated on the 20th and as he takes office his immediate mandate will be combatting the pandemic with vaccine distribution and fiscal stimulus as near-term priorities. On the monetary front the Fed has maintained its policy rate and continues to signal that we can expect rates to remain low as the year progresses to stimulate the economy. Most developed governments around the world will approach 2021 with the same philosophy and do as much as possible to fuel their economies until we are through this pandemic. Final Thoughts Human behaviour and biases have the availability to move markets significantly in the short-term, however fundamentals are what drive long-term performance. Investors who have tuned out the noise during the two most recent bear markets, held diversified portfolios and that have rebalanced strategically have been well served. We continue to believe in this strategy and with that said we encourage the use of pre-authorized contributions to tune out the noise and to stick to your plan. Stay safe!
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The Street (BNN)
Thursday, May 21, 2015 | Copyright © 2015 Bell Media
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