Many do-it-yourself (DIY) investors who do not use an investment advisor may have missed excellent returns as the market has revived beyond expectations.
Interest rates were up, US banks were failing, and recession fears had loomed since January 2023. Fear certainly affected the markets during Covid. Several media gurus were predicting doom and gloom — that the stock market might plummet another 20-30%, akin to the fear of another ’08 financial crisis!
When DYI retail traders see declines in their portfolios, they run for cover. Many sell assets in their portfolios, often just before the market rallies again, as in 2001 due to 911, 2008 due to the Financial Crisis, and 2020 due to Covid.
Surprisingly, inflation is reducing, and no recession has occurred yet. Thanks to professional institutional investors like mutual fund companies, markets have been soaring globally by 13% since January 1, 2023. The Nasdaq has risen 32%. The TSX is up year to date.
Many individual investors who invest independently were discouraged due to fear, as DIY trading activity was slow. Inflation and rising rates had a knock-on effect. As usual, fear causes us to miss out.
Canadians bought $7 billion in mutual funds from January through May last year. But, over the same period this year, they sold $9 billion worth of mutual funds — a $16 billion difference. – IFIC data
Year to date, as of June 30, 2023, the S&P 500 gained 16%, the TSX 4%, and the Nasdaq 32%!
The pessimistic effects of fear are observable; here are four examples of negative thinking:
Oil prices: When they rise, it’s suspect because it hurts consumer spending and drives inflation higher. When they’re falling, it’s terrible because they must be a sign of weakening demand, which means we could soon learn that the economy went into recession.
Home prices: When they’re up, it’s terrible because it means fewer people can afford to buy. When they’re down, it’s harmful because existing homeowners are seeing their net worth shrink, and some could fall into affordability issues on their mortgages.
Market volatility. High volatility is unsettling, reflecting elevated uncertainty. Low volatility is worrisome because it must reflect complacency in financial markets, leaving them vulnerable to a significant selloff when lousy news breaks.
Consumer spending: When it’s falling, it’s not good because consumer spending is the primary driver of GDP, so it must mean recession risks are rising. When it’s growing, it’s to be feared because it’s inflationary and may lead to unfriendly actions from policymakers.
Bottom line: When investors hire a professional advisor, a qualified approach builds your portfolio to help you avoid fears associated with investing.