Trick or Treat? Weathering Spooky Markets
Halloween is all about getting the shivers. But don’t let spooky markets get the best of you. Learn how municipalities can weather the ups and downs of financial markets with a solid investment plan and policy that are reviewed regularly.
It’s that time of the year again. Halloween conjures up images of creepy creatures, candy and costumes. Of course, getting lots of ‘loot’ is on every kid’s mind. If Halloween is all about giving kids the shivers, it’s been known to do the same for investors too.
Historically, October has been a pretty ghoulish month for the financial markets. ‘Black Monday’ was a notorious day when the S&P index dropped more than 20% on October 19, 1987. Coincidentally there was another ‘Black Monday’ on October 28, 1929, when the markets infamously faced a day of catastrophic losses.
The most important thing about investment planning is not getting scared off by short-term volatility but making sure that the long-term plan meets investment goals and reflects local risk tolerance.
This year, while there are a few frightful financial indicators, one need not be afraid. We are late in the economic cycle. With increasing signs of fatigue in this economic expansion, experts worry about a possible recession. Rather than having a knee-jerk reaction to these circumstances, now is a good time to ensure the investments in your portfolio have a suitable risk profile and continue to meet long-term needs. Too much risk could lead to negative outcomes but too little usually means your investment portfolio will see little growth. The key is to get the balance right.
Municipalities can achieve the right balance by regularly reviewing asset management plans and cash flow projections to ensure the investment policy and plan are still appropriate. In fact, the Municipal Act requires that an Investment Policy Statement be reviewed at least annually. That said, if municipal circumstances change, the investment plan may also need to be revisited. It should always be reflective of the unique needs and circumstances of your municipality. If it is not, then it is time for a refresh.
It’s critical to note that investment planning is forward looking, and it should not be reactionary. Occasionally financial markets get spooked, leading to lots of volatility and weakness in investments. Although a sharp drop in equities can be frightening, one should resist the urge to sell and run for safety. If your circumstances have not changed, neither should your investment approach. We advise in these circumstances to take the long view. Stick with your plan and try and be dispassionate – don’t overreact. If you don’t get tricked into reacting to markets, you’ll benefit from the “treats” of higher long-term returns.