October was rough for the financial markets in general. If you noticed a decrease in the value of your investment account, please know that there’s no reason to panic.
Dips are normal. The markets often go up like an escalator and down like an elevator, but if you stick with the plan, you’ll do better over time, even if you do take a few elevator rides once in a while.
Take the Toronto Stock Exchange, for example. In October, the TSX decreased by 6.5%. However, over the last 30 years, it has increased 6.8% on average every year.
Downturns are not only a normal part of investing, they can actually be an opportunity for investors to buy into the market at a discount (take, for example, dollar-cost averaging*). If you can look past the temporary loss and invest more when the market is down, you’ll be better placed to earn higher returns when the market is up again.
Why do stock prices go down?
When we talk about a downturn in the market, we generally mean that stock* prices are declining. To understand why this happens, let’s look at the difference between price and value. The price of a stock is first determined at the company’s initial public offering*, but will rise or fall depending on supply and demand. Supply of a stock at a point in time is determined by the number of sellers, and demand determined by the number of buyers. If supply decreases or demand increases, then prices tend to rise. But if supply increases or demand decreases, then prices tend to fall.
Value, on the other hand, is a subjective concept and varies by investor. You decide how much value to give stock depending on how you feel about the company it represents. It’s the price that you think it should be trading for on the market.
A rational investor will buy when stock price is below value and sell when price is above value. In fact, investors like Warren Buffett have made a living from doing exactly that.
What causes steep market declines?
Prices can fall quickly when the collective mindset of the market shifts from positive to negative sentiment about the future of investments available in that market. At a macro level, world events (like wars or natural disasters), political news (such as elections or tariffs), and the release of economic data or monetary policy decisions are some of the major forces that lead to a decline in prices. Sometimes there are a variety of factors weighing on markets and sometimes there’s no clear reason at all.
What we can say is that markets (like people) always have their ups and downs, which is why looking at the bigger picture matters.
So what does this mean for my Moka investment account?
If you noticed a dip, it’s likely that you are currently investing in a Moderate, Moderate-Aggressive, or Aggressive investment portfolio with Moka. These portfolios have greater exposure to stocks so your investments will have greater volatility (daily fluctuations) than a Conservative or Conservative-Moderate portfolio. This additional volatility means that you can experience larger losses in certain periods, and larger gains in others.
The trade-off is that expected returns in the long term are higher for riskier investments like stocks than for safer investments such as bonds or savings accounts.
What should I do now?
We recommend that you stay the course with your investments. We selected your portfolio based on information you provided about your goal, financial situation, time horizon and risk aversion. If you are in one of our riskier investment portfolios, chances are that your profile indicates you have a higher ability to tolerate short-term loss, perhaps due to factors such as a strong, steady income, a relatively long time horizon on your goal, and a higher tolerance for risk.
Of course, your investments are your investments, so you should decide what you feel comfortable doing, and this can change as you gain more investment experience. If you have questions or concerns about your investments, your dedicated portfolio manager is always available to chat and can answer any questions you may have about your investment strategy.
*Glossary
Dollar-cost averaging is an investment strategy that involves buying a fixed dollar amount of a specific stock on a recurring schedule over a long period of time. Investors buy more shares when the price is low and fewer when the price is high, but they will gradually build wealth as the value of that stock goes up and down.
Stock means ownership in a company. If you have stock in a company, you own a part of the company. Sometimes people use the terms ‘stock’ and ‘share’ interchangeably, but they aren’t the same thing. Think of stock as the pie and shares as the slices.
An initial public offering is the launch of shares in a company on a stock exchange. The company pays an investment bank to calculate the value of the company, the number of shares in the company and the cost of an individual share.