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BLOG SERIES: UNDERSTANDING RISK
Over the past couple of months, investors of all types have likely been caught off guard by global events that caused massive swings in the market value of their portfolio holdings. Unfortunately, some have realized that their investments were far too risky and have lost more than they could tolerate. The old gambler’s adage of not risking more than you are willing to lose holds true for investors as well – but how do we know how much is really at risk?
The COVID-19 global pandemic is a historic event that has galvanized intergenerational cohorts in the fight against a common enemy. I will not attempt to wax-poetic about the implications this will have on our way of life for when we inevitability get through to the other side of this epidemic, as there are much more qualified experts that can offer better educated opinions on the matter then I can. What I will attempt to do is explore a way to reframe the implications of this health crisis for investors that are dealing with both emotional and financial stress as a result of the pandemic.
There has been a lot of talk over the past few years about how passive investing and the rise of exchange traded funds (ETFs) would be the next financial market bubble that would wreak havoc for investors. There hasn’t been a period of panic in financial markets similar to what occurred in 2008 to test the mettle of ETF products – that is, until the COVID-19 pandemic of 2020.
Markets bounced back sharply last week, providing a much needed respite for equity investors. But, before we get too excited, we need to keep in mind that +20% rallies during bear markets are very common. In fact, the biggest up days in stock markets have historically occurred during major bear markets.
I recently attended the Calgary CFA Society’s Annual Forecast Dinner. It’s probably the only event of the year where the entirety of the city’s investment and finance professionals come out of their dens for some awkward hobnobbing.