Don’t let COVID-19 affect your retirement savings strategy
Updated: Apr 29, 2020
We all feel the turmoil that has affected public health around the world. Every day we see headlines talking about rising numbers of cases while government officials race to contain the pandemic. This unsurprisingly, has taken its toll on the stock markets.
While there is often an instinctive response among some investors to get out of a volatile market, it is important to think longer term, keep a clear head and be mindful of the risks inherent in such reactions. As noted by our Investment team, it is very difficult to time the market, and cashing out your investments requires you to correctly time the market not once, but twice.
Time in the market, not timing the market
As markets go through downturns, it is inevitable for some investors, concerned about the depreciating market value of their savings to attempt to cut their losses by cashing out. The problem with this approach is that by selling at a lower value, they make permanent the otherwise temporary losses incurred. The only way for them to recover those losses is to reinvest in the market at the appropriate time to benefit from the recovery. However, the fact is that some of the best recovery days occur shortly after the worst days. But these days of recovery do not always signal a sustained recovery. This ensures that attempting a timing exercise is even more fraught with risk.
Rather than engaging in the guesswork associated with timing the market, a much better approach is to think long term, remain invested and ride out the market as the volatility runs its course. The COVID-19 pandemic has strained public resources and exacted a staggering human cost on many countries. But like every other crisis, this too shall pass. And once it does, the global economy, and by extension the stock markets, recover over time as they always have. Judging by previous episodes, those that remain invested throughout the cycle are bound to benefit from the recovery.
To help people avoid the pitfalls of trying to time the market, we recommend adopting the concept of dollar-cost averaging. This is essentially a disciplined approach to investing, in which an individual invests the same amount of money regularly irrespective of how the market fares. So, in the context of an RRSP, this would be the same as having automatic payroll deductions set up.
By contributing the same amount during both “bear” as well as “bull” markets, an investor benefits from lower investment costs on average. For instance, during a downturn when equity prices are low, someone investing the same amount would be able to buy more units. Conversely, when equity prices are high, an investor would buy fewer units while still investing the same dollar amount. On average, an investor that employs this systematic process will typically pay less for units relative to those that adopt a more sporadic approach.
The long-term view
What all these approaches have in common is a focus on the long term. A financial planning cliché, but one that is accurate, is that saving for retirement is a marathon not a sprint. Throughout the long journey towards retirement, there will inevitably be periodic market downturns driven by various factors one has no control over. By maintaining a long-term view, an investor can avoid costly reactions of selling low and buying high.
The COVID-19 pandemic is without a doubt one of the most devastating events in recent memory. Yet as governments around the world mobilize to both contain the spread of the virus, as well as mitigate its impact on the economy, we can see the seeds of a future recovery being sown.
Sooner or later, public health, the economy, and by extension the markets, are bound to recover. Keeping this in mind despite all the troubling headlines should serve investors well in the months ahead.
If you are a client of Open Access and you have any questions regarding your retirement savings account, please do not hesitate to contact our Client Relations team by phone at 1 (866) 625-4777 or by email at firstname.lastname@example.org.