After making an initial investment of $10,000 in 1987, they each save $100 a month for the next 33 years, from 1987 to 2020, putting their money into the same mutual fund, but using three different tactics. Our three investors go through the same major crises: the 1987 stock market crash, the technology bubble of the early 2000s, the 2008 financial crisis and the 2020 selloff caused by COVID-19.
Simon: the unlucky investor
Simon puts $100 into a savings account each month and constantly monitors the markets while waiting for the perfect opportunity to invest. Unfortunately, he’s rather unlucky: he always chooses the worst time to invest his accumulated savings. Each time, he invests just before major stock market corrections. Despite this, the $49,400 that Simon saved has grown to $147,284.
Isabelle: the lucky investor
Like Simon, Isabelle deposits $100 a month into a savings account and constantly monitors the markets while waiting for the perfect opportunity to invest. Luck is with her: each time she invests when the markets are at their lowest. She benefits from the market’s upturns and she never sells, which is why the $49,400 she saved is now worth $236,089.
Zineb: the regular investor
Zineb doesn’t monitor the markets. Instead, she systematically invests her $100 monthly contribution directly into her investment account. Every month for 33 years, $100 is withdrawn from her account without her having to worry about it. She accumulated $247,501.
Periodic payments: $100 a month
One-time payments: The sum of periodic payments with a savings account return
Savings account return: 2% annualized
Investment horizon: 33 years from August 31, 1987 to June 30, 2020
* Calculated from the MSCI Canada Index
Source: FÉRIQUE Fund Management
What can we conclude from this example? Trying to time the markets is an investor’s enemy par excellence. Whether you are lucky or not, studies have shown that investors who give in to this temptation find themselves more often than not undermining their performance rather than improving it.1
Solutions to stay on track
Periodic investment
By saving systematically, the same amount is invested no matter what happens and without regard for market fluctuations. Moreover, periodic investing promotes discipline, which puts you on the right track to achieve your goals.
Investment diversification
Diversification means not concentrating your investments in the same asset classes. A properly diversified portfolio will be less affected by volatility and will stay in sync with the investor’s level of risk tolerance and objectives. In addition, by maximizing compound returns, optimal diversification can help you achieve your goals more quickly.
Portfolio rebalancing
A portfolio’s balance can be precarious due to constant market fluctuations. This precariousness means we must periodically rebalance assets to prevent the portfolio from drifting away from its target. The main function of rebalancing is to preserve the balance between your portfolio’s risk and return, which prevents you from deviating from your investment strategy.
Contact the FÉRIQUE Investment Services Advisory Services team or click here to open an account online and set up a systematic savings plan.