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Many investors have been burned by recent market downturns. Some indices saw losses of over 20% while the Nasdaq was knocked down more than 30% at one point. Many single stocks fared far worse.
When markets are tumbling, it’s easy to sense panic and make decisions that are overly emotional at best and downright damaging at worst. But we’ve all been there. Making investing mistakes is part of the process, and our goal should be to make sure we don’t compound those mistakes when they happen.
Let’s take a look at some of the common investment mistakes we saw in 2022 and what you can do about them.
Sold, sold, sold
A common investment mistake during a plunging market is to sell your equities and hold onto cash. The problem with this reaction is that, by the time you sell your assets, they’ve already lost a considerable amount of their value.
This investing mistake can then be compounded by trying to time the market and waiting until the market bottoms before buying back into it. The problem with this is that by the time you realize that the market has bottomed out, it has often bounced back to a level that’s left you behind. Many investors who try to time the market end up missing out on market gains.
Another issue with sticking with cash during times of high inflation is that your money effectively loses value, given that savings returns are nowhere near as high as current inflation.
Held onto current investments but stopped investing further
Another common investing mistake during falling markets is to stop investing altogether. You might realize you need to hold onto your assets to benefit from the market bounce-back, but you’re worried that your money will lose value almost immediately if you buy new assets.
While this can sometimes be true, it brings us back to the concept of timing the market. When will you start investing again? And how will you know if that will be the best time to dip your toe back into the markets?
Indulging in panic buying and selling
Falling markets can certainly instill panic in investors, especially those with less experience. Panic can be a prime driver of common investing mistakes. Offloading assets during a dip and then buying when the markets have jumped back up can cause your portfolio to become unbalanced. Selling assets during a dip also means that you lock in those losses.
Having a solid investment plan should help ensure that you don’t make any rash or panicked decisions. A well-constructed portfolio will be able to weather market dips and help your investing goals stay on track.
How to correct your mistakes
There are a number of ways that you can benefit from a difficult situation and improve your portfolio for the current market circumstances. Here are some strategies to consider that can help you compensate for any investing mistakes you may have made.
Review your investment goals after significant market declines
The last time you discussed your portfolio with your advisor, or thought about your own portfolio critically, you may have been a conservative investor, uncomfortable with the risks of the equity market. After equities drop in price, it could be worth reassessing that view. It could be time to become more aggressive and move up the risk threshold to balanced or even growth levels of equity allocation.
By the same token, if you were a growth investor and the market moved heavily against you, you might want to downgrade your risk profile. You could move into more defensive categories and increase your holdings in the fixed income space, as yields have improved tremendously after being a down market for two years.
Stay invested
By continuing to invest, you can benefit from an investing strategy called dollar cost averaging. This involves investing a regular sum of money into the stock market, regardless of how the market is performing. It’s based on the long-term historical precedent that the markets always bounce back. No matter how much they fall, or for how long, eventually they recover all their losses and start to make gains again.
So, when you consistently invest in the market, you will likely eventually benefit from buying stocks at their lowest point and seeing them bounce back in value. For investors who intend to stay invested over a long timeframe, this is a great investment strategy. It can be a serious investing mistake to stop investing for any given period — you could miss out on any market bounce-backs.
Use tax-loss harvesting to recoup some losses
If you have sold, or are thinking of selling, assets that have lost some of their value in taxable accounts, you can use tax-loss harvesting to reduce your taxes on assets that have gained value. Let’s say you have a marginal tax rate of 33%. If you sold assets that had increased in value by $20,000, you would have to pay $3,300 in capital gains tax.
If you also sold assets that had lost $10,000 in value, you could offset $1,650 against your gain. Your tax obligation would therefore be $3,300 - $1,650 = $1,650. Find out more about tax-loss harvesting and how to do it without upsetting the balance of your portfolio.
Diversify your portfolio with infrastructure
Infrastructure assets provide essential services, such as airports, roads, bridges and pipelines. They therefore tend to produce consistent cash flows and earnings that don’t react much to market movements. This asset class has consistently generated competitive income compared to bonds, and above-average income compared to equities.
Allocating a portion of your portfolio to infrastructure can provide both growth and income, while outperforming equity markets, particularly during periods of high inflation. One easy way to gain access to publicly traded infrastructure assets is with the Mackenzie Global Infrastructure Index ETF (QINF). It contains dozens of holdings from North America, Europe and other parts of the world, which will also help boost your portfolio’s diversification.
Consider investing in dividend-paying companies
Dividends and dividend growth have accounted for an overwhelming majority of stock returns over time, both in the US and globally. And companies that consistently pay out dividends typically have a strong management team. Dividend-paying companies can provide several advantages to investors, particularly during times of high inflation and volatility, including:
- Higher portfolio yields, thanks to dividend payouts.
- Reduced volatility: dividends paid help mitigate against the potential depreciation of a company’s stock price.
- Greater diversification and a wider selection of opportunities when choosing global dividend-paying companies.
An efficient way of getting exposure to high quality global dividend-paying companies is to invest in the Mackenzie Global Sustainable Dividend Index ETF (MDVD). It contains dozens of companies from North America, Europe, Australasia and Asia, from a wide variety of industries.
Easily change the balance of your portfolio
If you’re looking to change your risk threshold, either by adding more equities or more fixed income to your portfolio, asset allocation ETFs can do this extremely efficiently.
Asset allocation ETFs are funds that contain several other ETFs, thereby delivering a complete portfolio’s worth of assets (both fixed income and equities). They provide huge diversification with just one fund.
Let’s say you have a conservative portfolio and you want to take advantage of low-cost equities. Investing in a growth allocation ETF would immediately increase your equities allocation and place your portfolio in a good position to take advantage when the markets eventually bounce back.
Conversely, you may feel that your portfolio needs more fixed income assets. Investing in a conservative allocation ETF would bring you immediate exposure to hundreds of fixed income assets, as well as equities.
Mackenzie has a selection of asset allocation ETFs that can help rebalance your portfolio: Conservative (MCON), Balanced (MBAL) and Growth (MGRW). You can use them to make subtle or more acute changes to your portfolio.
Find out more about correcting your investment mistakes
To find out more about how reconstructing portfolios with Mackenzie ETFs, to compensate for investing mistakes, reach out to your Mackenzie sales team. Investors, talk to your financial advisor.
Commissions, management fees, brokerage fees and expenses all may be associated with Exchange Traded Funds. Please read the prospectus before investing. Exchange Traded Funds are not guaranteed, their values change frequently and past performance may not be repeated. The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.
This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of November 8, 2022. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.