COVID-19 – Investing in a downturn

Nader Hamid, Portfolio Manager with TWM Group at iA Private Wealth presents our video. 

It’s been a difficult period especially when we’re looking at the markets over the last month. 

In this video, we want to share with you the different investment options when we’re in a downturn and we’re going to use 2008 as a case study. Essentially, in a market correction, you have four options:

  1. You can sell your stocks and reinvest in one year.
  2. You could stay the course and do nothing. 
  3. You could stay invested and make some monthly contributions into the market, or
  4. You could stay invested and add a lump sum during the drawdown.

The chart shows that although you end up recovering your initial capital in every single case, the main difference is the time you will need to recover. It illustrates the growth of a portfolio of $100,000 during and after the 2008 crisis. Selling and reinvesting in one year is the least desirable option and extends the initial recovery period by about nine years. It would have taken you until 2017 to recover the money lost in 2008. 

Staying the course and doing nothing had a recovery time of approximately two years and investing back slowly or dollar-cost averaging was an improvement overstaying the course. 

Finally, investing in a lump sum during the drawdown reduced the time to recovery by 30%. 

Although, it’s not always easy to do this, especially when the news is at its worst and uncertainty is at its highest, investing a lump sum during a drawdown has historically been the strategy with the best results. 

Now, let’s take a look at the worst quarters for the US stock market since 1950. In the quarter we just experienced, the markets went down by 19.6% and while this is quite a large drop, there were similar drops in the past, all followed by very strong rebounds. In 1974, for example, the oil trade embargo caused markets to tank as much as 25%, but a year later, they were up 38%, 3 years later up 73% and 5 years later, up 118%.

On Black Monday of 1987, markets were down over 22% for the quarter. A year later, they were up 17% and 5 years later, up 109%. And more recently, the European debt crisis caused a 14% drop in the markets in the third quarter of 2011 and a year later they were up 30%, 3 years later up 86% and five years later, 113%.

The Key Takeaway?

During these highly volatile periods, although no one can foresee the future, historically it pays to take advantage of opportunities arising from times of crisis. On behalf of the entire team at TWM, thank you and feel free to reach out to us.

Invest with TWM Group

Our clients and their families typically have a net worth of $2M or more. If you have an amount under the minimum, we still invite you to get in touch with us to discuss your options.