A feature, not a bug

I want to revisit a brief but important point about the markets: sometimes they go down. That’s the normal case. It’s a feature, not a bug. 

Although the risk of a decline can never be eliminated, it can be dealt with. Just like houses in Los Angeles are designed to deal with occasional earthquakes, investment plans should be designed to deal with occasional declines.

Below, I’ll echo something I first wrote about last February. I think the most effective way to understand market declines is through the lens of long term thinking. Only then can investors truly appreciate and even welcome occasional declines... they provide wonderful opportunities to acquire companies, and generally ensure good results going forward.

Over the last 45 years, Canadians have had a lot to worry about. Here’s a short list: natural disasters, recessions, government deficits, the fall of Soviet Union, war in the Middle East, oil prices, the flash crash, y2k, the dollar, terrorism, an energy crisis, gold, unemployment, debt downgrades, and a total economic meltdown.

The good news is that none of it matters in the long run. This chart illustrates every annual return for the TSX since 1970:

About 25% of the time, the TSX has produced gains in excess of 20% in a year. 35% of the time, the TSX produced over 10% return. 60% of the time, it produced over 5%.

How many times has the TSX finished a year down more than 20%? Once. And how many times has the TSX finished down more than 10%? 7 times, or about 15% of the time.

Investing does not require any special ability to forecast the future or react to events. A simple inclination towards companies with higher return on equity, along with some patience, can produce truly wonderful results over time.

Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.