Market volatility creates opportunity to rebalance

There’s an old saying that says the Chinese symbol for the word ‘crisis’ is made up of two words, ‘danger’ and ‘opportunity’. With all the danger that we have seen in the markets over the past week, is there any opportunity in this crisis? Let’s start by looking at the markets and what has happened

In a few short days the TSX has pulled back 9% to 10%. From the 52 weeks high in March we are down 18% to 20% and year to date, we are down 13% to 14%. Canada is feeling this correction hard as the metals and mining sector is getting hit the hardest. Gold, of course, is the only place that is winning as investors flock to the so-called ‘safe haven’.

What is causing all this volatility?

One word – FEAR! The markets have always run on fear and greed and fear is a big driver in this current market. People are fearful of the debt issue in the US. They are fearful of a slowing economy. They are fearful of pretty much everything – inflation, interest rates, job stability, etc.

Remember that the markets move on supply and demand and when there are more sellers than buyers, the markets go down and when there are more buyers and sellers, the markets go up. Quite simply there are more sellers today because of the fear and uncertainty of the future. This should not be new to anyone.

What do I make of all this?

Once again, I was on the Alberta Primetime Monday Money Panel talking about all this so I thought it was an opportune time to share some thoughts from the panel.

Market volatility and more specifically market corrections, always ignite the market timing debate. Can you predict market downturns and reduce exposure to stocks before it happens? Should you get out now in fear that it will get lower?

Academic research has proven over and over again that it is really difficult to time the markets and essentially ‘predict’ the future with any degree of accuracy. This is precisely why there has been a proliferation of low cost, passive investment strategies that don’t try to beat the market but rather replicate the market.

What’s the best strategy ahead?

If you think about it, there are three strategies you can implement today. You can buy more, sell-out or hold on. One of my favorite sites Million Dollar Journey has posted a poll that suggests people are split between buying or holding. Only a 3% plan to sell. Go and put your votes in as well.

Back in 2008, I wrote an article after the correction my advice today would stay pretty much the same (which is why I call it timeless advice) – Timeless advice for the recent market volatility

Rebalancing is the opportunity?

The investment industry is the only industry that contradicts the natural reaction to price changes. Normally, when the price goes down, we consider that a sale and it triggers a reaction to buy. This can be seen in consumer-driven opportunities like boxing day sales or Black Friday sales.

In the investment business, when prices go down, there is never a line up to buy but rather a line up to sell at lower prices. Despite the logical mantra of “buy low, sell high”, investors prefer to sell low and buy high because investor psychology leads us to irrational behavior and thinking. When an investment goes up, we can’t help but think it will keep going up. And when markets go down, they think markets will keep going down.

The one opportunity available to all investors in times of extreme volatility is the opportunity to rebalance the portfolio. I’ve been tracking the rebalancing strategy against other strategies since 1990. I used the example of four brothers who each employ 4 different investment strategies:

  1. The first put $10,000 every year into the same investments in the same mix
  2. The second puts $10,000 into last years winner
  3. The third brother puts $10,000 into last years loser
  4. The fourth brother uses the $10,000 to rebalance back to the original mix.

Over 21 years, rebalancing wins. After 21 years:

  • the brother that rebalances has $471,000
  • the brother that buys and holds has $463,000
  • the brother that chases performance has $444,000
  • the brother that chases losers has $440,000

Rebalance your portfolio today!

If you have a plan, rebalancing is just bringing the investment mix back to the original plan or mix. For those without a plan, look at your portfolio from the beginning of the year and determine your asset or investment breakdown then. Do the same today and if nothing has changed, then bring your portfolio back to the original mix you had at the beginning of the year. rebalancing can be uncomfortable because it means increasing stock exposure as opposed to decreasing it. This will ensure that you will buy low and sell high which is logical, the only way to make money.

The brilliance of boring investing

When we talk about timeless market strategies, I come back to a book written by my friend Marshall McAlister who is a portfolio manager with Pavilion House here in Edmonton called “The Brilliance of Boring Investing.” Every investor should read this book because it reminds us of what really works in investing:

  1. Have a plan and stay disciplined (Investing is a SCIENCE, not an ART)
  2. Manage your risk before anything
  3. Control your costs
  4. Rebalance from time to time
  5. Ignore the ‘noise’ that causes you to ‘cheat’ from your discipline


  1. The Blunt Bean Counter


    As usual, calm and sound advice. The problem is buy, sell , hold or rebalance, the TSX is down 2% over the last 5 years, hard for those in retirement or planning for retirment to maintain their retirment standards or reach their retirement goals.

  2. cashflowmantra

    Interesting that only 3% plan to sell. So where is all the selling coming from?

    • Jim Yih

      I was thinking the same thing myself!

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