What’s an investor’s worst enemy?

Ashleay: Welcome to the In Your Interest! podcast from iA Financial Group, where we discuss your need-to-know economic news and how it affects your finances. All this in under 10 minutes. Let's dive right in. As someone who's interested in investing, it's good to know who an investor's worst enemy is. My name is Ashleay. I'm here with my colleague, Sébastien Mc Mahon, Chief Strategist and Senior Economist at iA Financial Group. Hi, Sébastien.

Sébastien: Hey, Ashleay.

Ashleay: Sébastien, as investors, what's the one thing we need to watch out for?

Sébastien: The worst enemy of every investor is emotions. Everyone's facing the same markets. It's how we navigate through the markets that differentiates the good versus the not-so-good investors. Let me take you through the emotional curve of the typical investor. The economy is cyclical, markets are cyclical and also the emotions that you'll be going through in the markets are cyclical. Let's start with the market that's rising, what we call a bull market. You have investors that are optimistic at first and then there are signs of impatience. At some point, there's the first trap, excess confidence. Let me describe that, it’s as if you feel that there is a big party that everyone seems to be invited to but you, that's when people tend to buy at the peak of fads. They tend to buy the speculative things when they've already given the exceptional returns. And then after that, what goes up always needs to come down. On the way down, the risk is that it's going to rebound, and then you start to have some regret. But you paid all this money for this investment, so let's wait until it rebounds. And then at some point when things continue to go down, you say, well, I can't take this anymore. There is despair, there's panic. And then people sell at the wrong moment. Everyone, if you ask them when they're sitting at home just enjoying a good glass of wine, they will say: "Of course, I understand that markets are for the long run. I'm investing for my retirement or I have long-term objectives, so I understand that." But in reality, the long run is made up of very short-term episodes, and that's where the traps are, the emotions that can catch you in these short-term episodes.

Ashleay: Right, so it's nice to convince ourselves that investing is a long-term exercise, but in reality, it's easy to fall into that trap and change our investments if there's an event that triggers our emotions and makes us want to sell our shares. But why choose long-term investments? We often talk about this.

Sébastien: Yeah, of course. If you invest for the long term, the odds of losing money or at least not having a decent return are very low. Let's say that it's the summer and you get your statement from your investments and you realize that since the beginning of the year, performance has been tough. You've been down -10, -15, -20%. Well, you need to realize that this is the short term. And if you look at the returns on the S&P 500 since the 1950s, so here I'm looking 70 years plus into the past, the worst year that we've seen in the last 72 years was -39% and the best year was +47%. There's a wide spread there. But if you start to look at longer terms, such as five-year periods, you start from 2000 to 2005, 2001 to 2006 and you roll all the way to today, well, the worst return annualized, which means to bring that to an annual return for a period of five years, is -3%. You start from -39% all the way to -3%. If you look at rolling windows of ten years, so a ten-year span, the worst that we've seen is -1%. If you look at the window of 20 years, the worst that we've seen on the S&P 500 annualized is 6%. The odds of losing money, in the long run, are very, very, very low. Investing for the long run, pays.

Ashleay: Absolutely. Thanks, Sébastien. What are your tips for our listeners?

Sébastien: The first tip I would give is that the best investment that you can make is the one that doesn't keep you awake at night, so you need to know yourself. It's important to be honest with yourself when you do an assessment of your risk tolerance, and you don't want to overestimate it. So if you're in this situation: sometimes you're waking up in the night and you're thinking about your investments, maybe you need to go back to the drawing board, do an investor profile, and make sure that you're in line with that. That's the first piece of advice. My second advice would be to talk to your financial advisor. We strongly encourage everyone to have one. The financial advisor will be able to give you good advice, will be able to protect you from yourself and you'll be able to have someone to talk to when you're feeling some of these emotions to keep you aligned with your long-term objectives.

Ashleay: Absolutely. But a financial advisor, I mean, even if there are fees related to their services, it's worth it?

Sébastien: Yes, it is. Some studies showed that in the long run, the investors that have a financial advisor in their life tend to do much better than those that don't. It covers more than the fee that it costs.

Ashleay: Right. And do you manage your own funds?

Sébastien: Actually, no. I do have a financial advisor, too. I love the financial advice that I can get from that person. I'm in a privileged situation where I can invest in the funds that I manage professionally. Professionally, we're really removed from emotions. We have all these systems to help us. So might as well benefit from that. I like to invest in the funds at iA that I co-manage.

Ashleay: Great. Thank you, Sébastien, for sharing your knowledge and your time. It's very interesting and an investor will know what to watch out for in the future to fully benefit from their investments. Love this podcast? Want to know more about economic news? Follow our In Your Interest! podcast available on all platforms. Visit the economic news page on ia.ca or follow us on social media.