When comes the time to invest, different approaches are possible and can affect your outcome. Let’s take the example of three investors: Simon, Isabelle and Zineb.
After making an initial investment of $10,000 in 1987, they each save $100 a month for the next 33 years, from 1987 to 2020, putting their money into the same mutual fund, but using three different tactics. Our three investors go through the same major crises: the 1987 stock market crash, the technology bubble of the early 2000s, the 2008 financial crisis and the 2020 selloff caused by COVID-19.
Simon puts $100 into a savings account each month and constantly monitors the markets while waiting for the perfect opportunity to invest. Unfortunately, he’s rather unlucky: he always chooses the worst time to invest his accumulated savings. Each time, he invests just before major stock market corrections. Despite this, the $49,400 that Simon saved has grown to $147,284.
Like Simon, Isabelle deposits $100 a month into a savings account and constantly monitors the markets while waiting for the perfect opportunity to invest. Luck is with her: each time she invests when the markets are at their lowest. She benefits from the market’s upturns and she never sells, which is why the $49,400 she saved is now worth $236,089.
Zineb doesn’t monitor the markets. Instead, she systematically invests her $100 monthly contribution directly into her investment account. Every month for 33 years, $100 is withdrawn from her account without her having to worry about it. She accumulated $247,501.
Periodic payments: $100 a month
One-time payments: The sum of periodic payments with a savings account return
Savings account return: 2% annualized
Investment horizon: 33 years from August 31, 1987 to June 30, 2020
* Calculated from the MSCI Canada Index
Source: FÉRIQUE Fund Management
What can we conclude from this example? Trying to time the markets is an investor’s enemy par excellence. Whether you are lucky or not, studies have shown that investors who give in to this temptation find themselves more often than not undermining their performance rather than improving it.1
Solutions to stay on track
By saving systematically, the same amount is invested no matter what happens and without regard for market fluctuations. Moreover, periodic investing promotes discipline, which puts you on the right track to achieve your goals.
Diversification means not concentrating your investments in the same asset classes. A properly diversified portfolio will be less affected by volatility and will stay in sync with the investor’s level of risk tolerance and objectives. In addition, by maximizing compound returns, optimal diversification can help you achieve your goals more quickly.
A portfolio’s balance can be precarious due to constant market fluctuations. This precariousness means we must periodically rebalance assets to prevent the portfolio from drifting away from its target. The main function of rebalancing is to preserve the balance between your portfolio’s risk and return, which prevents you from deviating from your investment strategy.
FÉRIQUE is a registered trademark of Gestion FÉRIQUE and is used under license by its subsidiary, Services d'investissement FÉRIQUE. Gestion FÉRIQUE is an Investment Fund Manager and assumes management duties in relation to the FÉRIQUE Funds. Services d'investissement FÉRIQUE is a Mutual Fund Dealer and a Financial Planning Firm, as well as the Principal distributor of the FÉRIQUE Funds. Please note that for commercial purposes, Services d'investissement FÉRIQUE is also known in English as FÉRIQUE Investment Services.
There may be brokerage fees, trailing commissions, management fees and expenses associated with investment in the Funds. Management expense ratios vary from one year to another. Please read the prospectus before investing. Mutual funds are not guaranteed, their values fluctuate frequently and past performance may not be repeated.
The hypothetical rates of return or mathematical tables are used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual fund or returns on investment in the mutual fund.
The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns.
This document is intended for informational purposes only. The information provided does not constitute investment, financial, legal, accounting or tax advice. You should not act on the information without seeking the advice of a professional.