Preparing for Market Unknowns: Tips for Investors

Be prepared. The motto is perhaps best known to boys and girls in the Scouting world, but it applies just as well to investors – particularly these days as COVID-19 shows few signs of waning, and uncertainties around the U.S. Presidential Election continue to play out.

But what does being prepared as an investor mean when facing unknowns?

"The starting point to dealing with market surprises is to look at history and realize there's been a lot of them over time," says Stu Kedwell, senior vice president and co-head of North American equities at RBC Global Asset Management. He learned that tip early on in his career from a boss who used to keep a long list of past market surprises on her office wall – a reminder that dealing with market volatility is part of what it means to be an investor.

Kedwell says history shows us that there is wide range of possible outcomes in markets in the short term, even though not nearly as wide in the long term, reinforcing the importance for investors to put a plan in place ahead of time. We asked Kedwell recently for his thoughts on markets in the weeks ahead, how to maintain a sense of optimism, what role cash plays for investors and how to manage emotions – and, in turn, feel better prepared for market surprises.

On markets…

There's little precedent for the healthcare crisis brought on by COVID and the impact it's having (or could have) on the economy, Kedwell says. And with the U.S. presidential election landing squarely amid the healthcare crisis, that's clouding issues even more for markets.

"What's really important is for markets to see a pathway to stimulus and then eventually a vaccine," Kedwell says. "If it's a contested election and goes all the way to the Supreme Court, that would likely delay stimulus getting out the door. The longer it take for stimulus, the more hardship that enacts," he adds. U.S. lawmakers have been struggling to reach a new fiscal stimulus deal before Election Day to help shore up the U.S. economy.

"Government support is very important to the economy until there is a vaccine," Kedwell says. On the upside, with so many advancements on the vaccine front and the possibility one or more could be in place by next summer, the U.S. government should feel confident in providing stimulus. "Their ability to add support is quite high since they know the current situation isn't forever," he says.

Central banks are also key, he adds. "So far, between governments and central banks, they've done a tremendous amount to cushion the blow; the more support they provide, the further out people can look," he says, referring to the ability of investors to plan for the future.

On optimism…

Kedwell says investors should keep in mind that, "in general, over time, it has paid to be optimistic." With the current situation in mind, he also offers up the following positives investors should consider when it comes to markets and their portfolios:

• Businesses are dynamic, which means they're constantly thinking of solutions to problems and ways to pivot.
• Central bankers focus overall on either providing or taking away liquidity from the marketplace; right now they're definitely focused on providing it, Kedwell says, which means investing can take place based on the merits of investments.
• Governments so far have been focused on support, which helps provide support amid the "negative events."

Still, for investors, looking at the fundamentals of an investment is always important – particularly at a time when valuations, while reasonable relative to interest rates, are elevated.

On cash…

"Even in today's environment, when interest rates are so low, cash still provides a lot of optionality to deal with volatility," Kedwell says. In a portfolio, he adds, cash is a stabilizer, but also allows investors the flexibility to take advantage of an opportunity should it arise.

He likens an investor's take on cash to an idea that Warren Buffett made popular: Cash is like oxygen – when it's plentiful you don't think about it, but when you need it, it's the only thing on your mind.

On emotions…

"When markets are volatile, emotions run high – that's human nature," Kedwell says. "Half the battle in deciding whether you're going to do something rash to your portfolio or not is acknowledging that there's a component to investing that is emotional," he adds.

He says it's key to understand that:

• Companies operate in competitive industries that can have various outcomes.
• Share prices rise and fall – sometimes for fundamental reasons, sometimes for liquidity reasons – and investors need to be able to withstand those ups and downs.
• Investors need to set their portfolio allocations and exposures taking into consideration both fundamentals and their own personal risk tolerances.

If an investor is feeling the pressures of market uncertainties, Kedwell says investors could acknowledge their emotions by making a small change to their portfolio rather than a large one that may have more permanent consequences that could impact a long-term plan.

"It's like making a lane change. You're still heading in the right direction, but maybe you've just changed lanes versus getting off the highway entirely," he says.