If there was ever a year that clearly illustrated that an investor should buy / hold for long-term, and ignore the noise, 2020 was it! If the sudden drop in the stock market caused one to become paralyzed, and do nothing, then congratulations, because that is exactly what a successful long-term investor does during a Bear Market. Per Warren Buffett, “Inactivity strikes us as intelligent behaviour”.
Due to the onset of COVID, between February 20, 2020 and March 23, 2020, the TSX, (and most global stock markets), dropped by about 35%. Since then, the TSX has snapped back, and is now slightly higher than it was a year ago. It is as if nothing changed.
But something did change.
We all learned firsthand that by not selling during a stock market downturn, an investor gives their portfolio a chance to fully recover from a Bear Market.
Investors need to remember that the Bear is just sleeping now, and there is a 100% probability that the Bear will awaken at some point, and stock markets will again convulse downwards by 20-50%. However, the next time the Bear awakens, we know an investors best defense is to simply... “hibernate”, and wait for Bear to wonder back to his cave, which clears the way for the next Bull Market.
The key to successfully investing for growth, is to make sure any money invested in the stock market can be left untouched for a minimum of 10 years, and preferably much longer. Not selling into a stock market downturn will ensure that there is time for a portfolio to recover and provide potentially attractive long-term average equity returns. Five years before one slows down working, and begins to draw money from their portfolio, one should move a significant portion of their portfolio into fixed income.
The New Year is a great time to reflect on what we are grateful for, revisit our long-term goals, and set out an action plan to help us inch toward those goals.
As of January 1, 2021, all Canadians now have $6,000 of additional TFSA contribution room. Contributing as early as possible, as opposed to later in the year, helps maximize an investors potential tax-free growth.