OTTAWA—It’s gut check time, financial advisers said this week as stock markets around the world went for a wild ride testing just how much risk investors are really comfortable with.
The S&P/TSX composite index plunged more than 768 points in early trading Monday, then recouped all but 77 points of that before again selling off for a huge loss of 420.93 points, or 3.12 percent, to 13,052.74 at the close.
The dive followed a tumble last week that saw the Toronto market suffer through five-straight losing sessions, including a string of triple-digit losses, that brought the TSX down more than 800 points on the week.
“If you are telling me today that your risk tolerance is not what you thought it was, and you’re in the wrong model and you don’t want any downside losses, then we have some things to chat about,” said Brent Vandermeer, a portfolio manager with HollisWealth.
“This is part of what equity markets have consistently done, and will continue to do,” he noted.
“And we have to endure these downside storms even though we get very fearful and worried it is going to keep going down to zero.”
The S&P/TSX composite index is down about 15 percent from its high reached last year while the Dow Jones industrial average is off more than 10 percent from its high reached earlier this year.
Sadiq Adatia, chief investment officer at Sun Life Global Investments, said if you aren’t sleeping well at night worried about your investments, you have too much risk.
“This is a great time to go and ask that question because it gives you a true answer as to what your tolerance for risk really is,” he noted.
But for those willing and able to withstand the downturn, Adatia suggested there may be opportunities to be had for some investors in some sectors.
“We think again that oil prices won’t be sustainable at $40 three years from now, so we see the energy sector as a great opportunity,” he remarked.
“But people have to understand they could still go lower and, in actuality, I think they are still going to go lower.
“But you’re not going to time exactly when those things start to bounce right back up,” Adatia added.
CIBC noted it expects the recent weakness in stock markets likely will continue into year-end.
“What started as a modest second devaluation of the yuan has now raised concerns of possible competitive devaluations, slower global economic growth, and new fears of deflation,” the bank wrote in a note to clients.
“Interest rates have again started to decline, emerging markets have been volatile, and equities have fallen,” it said.
“In our opinion, until we get some clear signs that deflation is not back on the table, and until there is evidence of stronger global economic recovery, equities will remain weak.”
While the drop in recent days looks big, the move remains relatively small compared with the downturn during the 2008-09 financial crisis.
During the financial crisis, the S&P/TSX composite index dropped more than 7,000 points from its 2008 high before reaching the bottom in 2009.
However, if the plunge in the markets has rattled your nerves and you’ve realized that you really can’t tolerate the risk like you thought you could, Vandermeer recommends making changes to your portfolio now—not waiting for a little bounce back.
“You can’t postpone and hope that tomorrow is better,” he warned.
“The trend is usually persistent for a while and that’s the unfortunate part.”