Investment Fire Drill

I was at a Manulife executive meeting in Toronto earlier this month and stayed over at a downtown hotel. At 1:15 am I was startled awake by the blaring of the fire alarm. Confused I rushed over to the thermostat to silence the alarm. When that did not work, and still being in a state of confusion, I then tried to silence it on my phone. At this point, with the adrenaline kicking into overdrive I realized that it was not my wake-up call, but was a fire alarm. A very loud and insistent fire alarm.

I did what I think all of us would do – I looked out the window to see if I could see fire trucks or smoke, then I looked through the peephole to see if there was smoke or flames there, but there was nothing. Then the alarm stopped and a voice came over a speaker calmly saying “This is the duty manager, we have had a fire alarm triggered on the first floor and we are investigating. Please stay in your room until further notice.” Then the alarms returned. I checked the map on the door for the nearest stairs and prepared a couple of things in case I needed to evacuate. A few minutes later, the calm voice interrupted the alarm with “This is the duty manager. We have investigated the alarm and it looks like a false alarm. We must wait until the fire department arrives to confirm our finding and ask that you remain in your rooms until we receive the okay from the fire department. We expect their arrival shortly.” Eventually the alarms were silenced.

On my ride back to Burlington I had a chance to reflect on my experience. I thought of how fire drills all through primary school, and even at the work place, had prepared me to appropriately respond to the fire alarm, and in some ways how it had made the alarm less unsettling because I could rationally respond and I knew how to react through practice.

The reason we have fire drills is to:

give participants an opportunity to experience the emergency in a simulated but safe environment;
Help participants develop appropriate behaviours for the emergency: and
Allow participants to feel, and deal with the emotions that will accompany an emergency.

I thought - What if we could run an Investment Fire Drill? We could help you to prepare emotionally and rationally to deal with a market correction. The last recession was over 10 years ago, and most of us will not remember what happened or how it felt, and frankly each correction we experience is tougher because we are older, have more money and are closer, or into retirement.

Over the coming few months, we are going to share a series of information bulletins with you. We hope that this Investment Fire Drill will help you:

Put a market correction in a historical context.
What should I be doing before, during and after a recession?
How do I ensure my current and future financial goals are secure?

But before we look at a future recession, let’s look at what happened in October, and 2018 overall. We have been through an unprecedented period of low volatility starting in late 2011. According to RBC Global Asset Management a typical year will experience 27 market declines (S&P 500) of greater than 1%. In 2017 we experienced 2 drops, and so far in 2018 we have experienced 25 drops greater than 1%. We have also experienced close to the historical average of consecutive day drops in 2018. Further, a study by Ned Davis Research claims that 2018 is historic because nothing’s working – not large or small cap, not Treasuries, not commodities or even real estate. So, if you are feeling that markets are more volatile right now you are both right and wrong. Right, because it is more volatile than it has been in a while, but wrong because it is more like how the markets normally behave.

As humans we tend to have a bias referred to as “Recency”, which means that we believe that what has happened lately, will keep happening. So even though we had been experiencing abnormally smooth markets, we expect them to keep on happening. The attached charts from RBC Global Asset Management help illustrate that our recent experience in 2017, is not likely to be repeated any time soon.

So, the investment fire alarm is going off – what do we do? Click here for Five Strategies for dealing with difficult markets. Think of them as your first steps once the alarm has gone off.

Watch for more information to follow, and remember that we are here to help ensure that your long-term goals are met, and help provide you with peace of mind.