Rob Campbell describes diversification as the art of “staying in two places at once.”
The portfolio manager with Calgary-based Mawer Investment Management said straddling competing risk strategies in turbulent times allows investors to realize gains in some areas of their portfolios even as they give up returns in other areas.
“Some of these high-duration companies, a lot of them are in the tech space are seeing quite significant corrections. But a lot of wealth will continue to be created by those businesses going forward,” he said.
Campbell said stock market returns tend to follow wealth creation. “So, the idea isn’t to eliminate that from the portfolio. It’s about ensuring that there’s balance in the portfolio,” he said. “With enough time and diversification, market corrections become less material.”
He believes in course correcting where possible, employing the aeronautical concept of removing sharp edges that create turbulence and can lead to catastrophic failure. As interest rates rise, for example, he increases exposure to securities that can withstand them, such as financials and blue-chip companies with buying power.
Better, however, is to build a portfolio carefully to begin with, anticipating economic challenges, and then trusting the plan.
“Having a clear and common-sense investment philosophy is a strategy that works over very long periods,” he said. “It’s about leaning into the planning process and trusting it when tough times come.”
Sarah Riopelle, vice-president and senior portfolio manager with RBC Global Asset Management, agrees.
“Making changes to a long-term investment plan in the depths of a crisis usually does not lead to very good outcomes for clients,” she said.
Times of extreme volatility arise every few decades, she said, usually spurred by a confluence of political instability, economic uncertainty and bad luck. The most recent example was the 1970s when an OPEC embargo led to high inflation and general consumer hardship.
“This time around, the bad luck comes in the form of a pandemic and the war in Ukraine,” she said.
Nevertheless, Riopelle urged investors not to be distracted by negative headlines, which tend to lean sensational.
“They’re written to attract attention. So, I caution people to not focus too much on what they’re reading in the paper or what sort of headlines pop up on their phone,” she said. Rather, she encourages people to stay focused on long-term goals.
Similarly, investors should not put too much stock in the kind of reports heard at dinner parties about other people’s market success.
“I expect there’s a little bit of bragging going on sometimes,” she said. “Just remember that every investor has a different risk tolerance, a different return expectation, a different time horizon. They’re planning for different life events.”
Both Riopelle and Campbell stressed the value of time in the market.
“Market volatility, while uncomfortable, is a natural part of the investing landscape,” Campbell said. “But time has the power to smooth everything out. The important thing is to be in the market.”
“Some of these big sell-offs end up being little blips when you stretch it out over a 30-year period,” Riopelle said. “And that’s not to dismiss the pain that you feel as you’re going through it, but it’s to demonstrate that if hold on and focus on a 10-, 15-, 20-year time horizon, you’re very likely to have positive returns.”
But going through the “blips” requires emotional strength.
“Focus on your own plan, your own needs, your own goals, and try to keep your emotions in check so they don’t get the better of you,” Riopelle said.
As for your clients, both portfolio managers said a reassuring phone call can be powerful.
“If the experience is really making your clients nervous, it may be time to talk to them about whether the asset mix or the portfolio structure is right for them,” Riopelle said.
“Emotions come with volatile markets,” Campbell said. “When doubts come, that’s the time to communicate more. Whether you’re an advisor or a client, pick up the phone and have a conversation with someone you trust.”