Portfolio Panic: How Worried Should I Be About the Stock Market Pullback? – National

With stock markets, cryptocurrencies and tech stocks off to a rocky start in 2022, financial experts say now is a good time to check your overall risk tolerance, but not the best time to ditch your trading strategy. long term investment.

Markets have been largely down since the start of the year amid escalating tensions around Russia and Ukraine, the continued spread of the Omicron wave of the COVID-19 pandemic and speculation that interest rates are set to rise amid rapid inflation.

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The all-country index and the S&P 500 have fallen around 8% so far in 2022, with the Nasdaq Composite set to have its worst start to the year since 1980 as high-flying tech stocks fall out of favor.

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Shares of heavyweights like Shopify and Netflix have fallen more than 30% since January 1, for example, with declines of more than 10% for Apple, Tesla and Facebook parent company Meta.

The S&P/TSX Composite Index, the benchmark for Canadian markets, has done better so far this year, but is still down 3.5% since the start of the month.

Derek Dedman, portfolio manager at Watson Di Primio Steel Investment Management in Ottawa, points to the general “uncertainty” of the moment as the main cause of the recent slowdown.

The fastest growing companies over the past two years — think tech, healthcare stocks — are also the ones poised to shrink as the market declines, he says.

“If some areas were to get hotter than others, I think they might cool down a bit faster.”

Portfolios that are weighted more towards higher-risk, higher-return investments are therefore more likely to be affected in a potential market correction.

It’s not just traditional stocks that are off to a bad start in 2022. Cryptocurrencies are also taking heavy losses, with Bitcoin losing more than half its value since the start of the year.

Some, including Meta’s former head of digital currency, David Marcus, have called the phenomenon a “crypto winter.”

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Emotions that need to be managed

While Dedman says he cannot advise the general public one way or another on whether to buy cryptocurrencies, he notes that the lack of consensus on the “true value” of these products makes them even more vulnerable to market fluctuations.

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Serious investors or even those who want exposure to digital currencies should consider their risk tolerance before buying or quitting Bitcoin and other crypto options.

“In a new so-called asset class, there will be even more emotions at play,” says Dedman.

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Natasha Knox, Director of Alaphia Financial Wellness in British Columbia, works with clients to help them lessen the impact of emotions on all aspects of their finances.

“The negative emotions people feel around this kind of market volatility are as many as people themselves,” she told Global News.

“It can be a feeling of absolute panic, of dread. It can bring out all kinds of fears. … The mind goes away and catastrophizes and generalizes because that’s what our minds do: ‘It’s falling, so I can never retire or I can never do this or things different.'”

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Both Dedman and Knox say the key thing to remember during downturns is that corrections are natural and unavoidable parts of market cycles.

While selling a tank stock may provide an immediate sense of relief, it could jeopardize the long-term investment strategy you had in mind when you first created the portfolio.

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“Trust in the asset allocation and the work you’ve done on your portfolio, trust that you know what you own and why you own it, and trust that you have a long-term goal and stick to it. the,” says Dedman.

“You don’t want to hurt your long-term prospects because of your short-term fear.”

Knox sympathizes with investors who might see a sudden drop in their investments, but agrees that a long-term outlook is needed.

“Seeing this drop in actual numbers, you know, it gets really scary,” she says.

“They have to look at the 30-year vision, not today’s vision. This is where our minds must go now. It’s easier said than done.

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Checking risk tolerance

Some investors might be more comfortable with drastic ups and downs in their portfolio, but risk tolerance is a “very fluid” thing, Dedman says. While an investor may feel good about risk during a recovery, tough times can quickly put real risk tolerance into perspective.

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“Maybe my portfolio was too risky because when we started to see volatility and I started to see prices go down, I struggled and didn’t sleep well at night and I I had this urge to move and I had to call my counselor every three days,” he says.

While Dedman says it’s generally best to wait for markets to normalize before acting, he says after a market correction is a good time to look at your portfolio balance and determine if the weighting of high, medium and low risk investments are appropriate.

Knox says it’s a balance some self-directed investors struggle to find.

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There will always be “cutting edge” products like cryptocurrency in the market that offer high potential rewards in exchange for greater risk, she says.

But knowing how to make those “shoot the moon” calls while ensuring the rest of your portfolio has a more balanced allocation is key to long-term financial stability, Knox says.

“There has to be some kind of recognition around, OK, this has a high payout possibility. There is a risk associated with this. And what percentage of my portfolio does it make sense, given my overall view, to have been allocated to something that has this kind of risk? This is where investors can further protect themselves. It’s the piece of history that’s missing.

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— with files from Reuters

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