Investing in the stock market isn’t for the faint of heart, but the old adage rings true: with great risk often comes great reward.
As the father of two children under the age of five, Tyler Buckingham considers himself a conservative investor. The hospital project administrator in his early 30s says he and his wife have an investment advisor who told them they had time on their side to invest, but the young couple elected to play it safer with their investments.
“He was very upfront about ‘the riskier you are, the more likely you are to get a larger amount of money, but you have to be able to take the ups and downs,'” says Buckingham. “He walked us through the process, we did an investment profile for ourselves, and we ended up selecting something that was a little bit more conservative than he suggested.”
Buckingham isn’t alone in his fear of jumping into the deep end of investing, despite acknowledging the possible rewards. Millennials have been recognized as the most risk-averse generation since the Great Depression, having grown up and seeing first hand the 2008 financial crisis and witnessing ongoing market volatility.
“One of the things that probably is to the detriment of young investors is this instant feedback on markets, because I think your risk tolerance can only be challenged when you’re seeing intra-day volatility and you’re seeing stock markets go up and down,” says Stephen Lingard, Senior Vice President and Portfolio Manager for Franklin Templeton Multi-Asset Solutions. “In some ways, the proliferation of information is really challenging.”
How low can you go?
Determining your risk tolerance is a matter of figuring out what your goals are, and the timeframe in which you’d like to achieve them. Lingard says it may be a matter of wanting your investments to keep up with inflation, or it could be not meeting a specific goal in time, like having enough money for retirement. The shorter your time horizon, the riskier the situation you’re in for investing.
“Time in the market is critical, and really should inform your risk tolerance,” says Lingard. “If it’s a short-term goal, you want to make sure you protect your capital so you can tolerate a significant risk-off event. If it’s a long, long time horizon, your risk tolerance is still important, but you can definitely focus on history and expected returns, which in stocks, for example, would be very, very good.”
Ultimately, Lingard says your investments should be based on what your goals are. If you’re saving up to buy a car in a year, for example, it’s best to avoid equities and go with something that will protect your capital.
What to invest in as a conservative investor
“Historically, the two major assets that an investor would invest in are stocks and bonds,” says Lingard. “Stocks have really generated very good returns in the last seven, eight years. But if you think about bonds, they’ve really had a 30-year bull run as interest rates fell, from the high teens in the 1980s to the two per cent, three per cent of today. That has resulted in huge capital appreciation in bonds, because as yields fall, prices go up for those bonds.”
But the shelter of safety for investors may be shifting.
“Bonds are typically what you’d include in a portfolio when you’re worried about risk,” says Lingard. “But the problem is the bond market today is riskier than it ever has been because interest rates are now going up. Generally what we’re telling people is if you’ve got a longer time horizon, you might be better off investing in equities.”
If you have a longer time horizon, like retirement, there’s a rule of thumb that you should balance your portfolio based on your age. Take your age, subtract it from 100, and that’s your equity-to-safety ratio. If you’re 50 years old, for example, it makes sense to balance 50 per cent stocks, 50 per cent bonds, while someone who is 25 may be better off with 25 per cent bonds, 75 per cent stocks.
Adam Hennick, Investment Advisor at Hennick Management, says that it’s kind of an antiquated way of approaching the problem, however, although it can be handy as a guide if you’re really starting from scratch and opting to make decisions without an advisor.
“There’s nothing wrong with doing it yourself,” says Hennick. “The most important thing is long-term performance.
“You need to see long-term growth. Long term starts for me at five years. Any three to five year period, including a financial crisis, it’s key to still have really good performance. Or find somebody to help you achieve that performance.”
One product that many investing firms offer for clients who prefer a more hands-off approach are target date portfolios, which take the guesswork out of maintaining an ideal balance between stocks and bonds as the market fluctuates.
Lingard says the target date portfolios at his firm will start out with predominantly equities when the investor has more time until retirement, say 40 years, and as the client approaches their retirement age, more bonds and safe investments will be included to preserve the existing capital.
“The investor doesn’t have to do anything,” says Lingard. “We manage that product as it evolves over time.
“Stocks over the next ten years is one of the only ways to get a positive, inflation-adjusted rate of return. Bonds need to be there for defence in the tough times, but they’re not there really from a return perspective.”
The other advantage to target date funds (and many funds more generally) is it ensures you’re getting exposure internationally, too.
“As a Canadian investor, you want to make sure you have international exposure as well to enhance the diversification and that reduces risk,” says Lingard. “Too many Canadian investors are just invested in the local stock market and local bonds. There’s a wealth of opportunities outside Canada…you have 70 per cent [of the Canadian market] that’s in very cyclical parts of the market, you go to a market like the U.S., yes you’re getting some technology but you’re also getting staples, you’re getting industrial, healthcare, telecom, more ‘Steady Eddie’ sectors.”
Getting over investing anxiety
Buckingham, like many young investors, isn’t just concerned about the potential risks that investing also harbours some concerns about the financial world as a whole.
“I have a deep-seated distrust for the finance industry,” says Buckingham. “I view the industry as a whole as mouthpieces of larger investors, whose aim is to get rich off of small investors like myself.”
Hennick says he’s not wrong to feel that way.
“There’s a dark secret among financial advisors and that’s the knowledge that most… they don’t do a great job,” says Hennick. “It’s not because they’re dumb, it’s because of the way the system is set up – put [the clients] into our product, and make sure it’s compliant so the client can’t come after us.”
But Hennick says there is one way to get past the fear of investing, and working with a stranger: knowledge.
“It’s hard to handle anxiety,” says Hennick. “The best way to get over it is to understand it.”
Buckingham and his wife decided on their current advisor, who works with the Investor’s Group, based on the recommendation of a trusted friend. He says that while he wishes he had the time to understand it more deeply, he likes the advisor they’re working with, and are satisfied with their current investment setup.
And really, that’s the true measure of conquering anxious investing.
“You have to be able to sleep at night, and be comfortable with what you’re investing in,” says Hennick.