Time is your biggest asset

What a difference a few months can make! This week, both the Canadian and U.S. equity markets reached new all-time highs. The recovery from the sell-off in Q4 of last year has been impressive, both in magnitude and in terms of how quickly stocks have risen from the Christmas Eve lows.  

Why am I writing about this? Because I have spent the last few weeks on the road and had the opportunity to speak to many advisors across the country. The common theme that I took away from these discussions is that the increase in market volatility and the aging business cycle have made both advisors and their clients nervous about what the future holds. 

I wrote a post in late January about the importance of staying invested, especially during periods of volatility. I suspect that for many, staying invested during late December and early January was a challenge and that when they met with their advisors early in 2019 to talk about RRSP contributions, the memories of the previous quarter were still fresh. As a result, many investors were hesitant to enter the market, holding out for a better entry point and leaving a lot of cash sitting on the sidelines or investing in cash-like instruments such as GICs and money market funds. 

It’s time in the market, not timing the market

Over the past four months, investors who stayed the course were likely better off because they benefited from rising markets. Those who have been sitting on the sidelines in cash this year have been reminded of how difficult it is to time the market as they have missed out on the impressive year-to-date returns so far. Periods like these are a strong reminder that it’s time in the market, not timing the market that will generate long-term investment results. 

Different solutions meet different investor needs

Choosing the appropriate investment solution should not be based on an emotional reaction to swings in the market. Instead, investors need to focus on three important elements: risk tolerance, time horizon and return expectations. The shorter your time horizon, the lower your tolerance for risk, and the more important capital preservation becomes when choosing investment solutions. In this case, a cash-like solution such as a GIC or money market fund is an option that should be considered. However, many clients have a much longer time horizon as they are investing for retirement or some other goal that is often many years away. In addition, they often need to earn a return higher than what a cash-like instrument can deliver to achieve that goal. In these cases, a well-diversified, multi-asset portfolio is the better option.

My personal situation can help to illustrate this point. I have two children in high school. I have been saving for their university education since they were born and am invested in one of the RBC Target Education Funds. My son will be going to university next year, so my financial planner suggested that I take the amount that I need for his tuition out of the fund and invest it in a GIC. The key driver behind her recommendation was the fact that I have a short time horizon and low tolerance for risk, and therefore capital preservation is important as I need to be able to pay his university tuition soon. However, my daughter won’t be going to university for a few more years, so her education savings are still invested in the fund. A longer time horizon means I have more time to recover from losses should they occur and so the likelihood of a positive return is much greater. 

The point I am trying to make is that an investor’s decision should be based on their risk tolerance, time horizon and return expectations, not emotion. There are investment solutions that can help clients meet a variety of goals. Cash instruments – such as GICs and money market funds – are important solutions to consider when time horizons are short, risk tolerance is low and capital preservation is the priority. However, as I’ve illustrated using my own situation, investors who have a longer time horizon and need a higher return over their investment period may be more suited to a diversified portfolio of investments. 

 It is our job as investment professionals to help clients through uncertain periods and remind them to stay the course and stick to their long-term investment plans. Remember….time is an investor’s biggest asset.

---------------------------------------------------------------------------------------------------------------Please consult your advisor and read the prospectus or Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers.