Many investors were probably shocked with the market downturns earlier this year. Viewed out of context and mixed with all the dire headlines, it may seem unnerving. But Michael Craig, Head of Asset Allocation at TD Asset Management, has a calmer view of things. Craig oversees the teams who manage the mutual funds at TD Asset Management, which includes selecting the various investments that are held within them.

“The biggest risk investors face is not a recession or market volatility,” he says. “The biggest risk that investors face is not getting their long-term goals right or not meeting those goals long-term.” And in order to do that, he says, it’s best for both fund managers and investors alike to stay invested. He points out that markets have recovered from their lows and relief efforts of governments are having a positive effect.

Craig says managing mutual funds and working to protect clients’ investments means putting practices in place to help lessen the impact when there is a setback, and capitalizing on opportunities as they arise. While he knows that words like “sell-off” and “recession” can sound scary, they are part of the normal cycle of an economy. In fact, they’ve happened before — for example, in the 1990s and 2008 — and economies have generally rebounded.

Speaking to MoneyTalk recently, Craig shared some of the strategies he and his colleagues use to help insulate investments against major shocks and to position them for future growth.

Being diversified

Craig says one of the keys to surviving highly volatile markets over the long term is to vary the types of investments held within a mutual fund — that is, not putting all your eggs in one basket. This strategy can effectively reduce the risk of any one type of asset pulling down the entire investment or mutual fund. This can be done by varying the types of investments held within a fund (a mix of stocks, bonds and cash, for example) as well as by varying the individual holdings in any one category. Should one category or sector suffer a downturn (say, airlines), another may be able to see gains that offset those losses (such as gold producers, for instance).

During the recent market selloff, Craig says, solid government bonds were able to provide some security and steadiness for mutual funds. “They were an offset when stocks tumbled. So, if you have a balanced portfolio, these government-backed investments are generally doing what you want,” he says.

Looking for opportunities to buy

Despite the downturn in the markets, Craig says this can be a time to hunt for bargains. He says fund managers are looking at companies that have seen their stock prices slip but still have great underlying potential. He also says having a long-term strategy can help make these opportunities seem sensible over time. Why? Because then you’re able to be patient and wait for the stock to reach its potential. “If you’re investing in high quality businesses and the price falls 20%, while the outlook short-term might be a bit more challenged, you have the same management team with that business…. You’re essentially getting the same business but for 20% less than before,” Craig says.

In the same way, individual investors who use monthly automated contributions to their mutual funds are able to take advantage of low markets. This is called dollar-cost-averaging. It effectively smooths out the cost of your investment over time and helps ensure you’re positioned to get a greater gain if the fund performance improves.

Watching a changing situation

Craig says he must also be vigilant about how the investing environment changes day-by-day. This means watching developments, whether it’s trade wars, vaccine developments or relief programs, and assessing how the news may influence clients’ investments. He is also observing all the usual statistics that help monitor the health of our economy: unemployment figures, consumer spending, inflation and corporate earnings, all of which help give his team a broad view of how the future is shaping up for people’s savings.

Assessing risks

Craig says the cycle of bad news can be exhausting and can distract anyone from focusing clearly on making rational decisions with their money. He says the main thing fund managers are taught is not to panic, and the same goes for mutual fund unitholders. If you sell out of a mutual fund when markets are low, losses on paper become crystalized and there may be no way to recover that money. For many investors, time will be on their side: Most investments should recover over time for investors to meet their long-term goals. Craig points out that in the course of an investor’s life there will be three or four recessions on average, as well as times when the markets will be highly volatile. This is not an aberration: it’s something fund managers plan for and why they take precautions with investment techniques to help lower the risk whenever they can.

Craig says that while these days may cause individuals to be emotional, he hopes that investors can continue to trust the work he and his colleagues are doing at TD Asset Management to help them reach their long-term financial goals.

DON SUTTON

MONEYTALK LIFE

ILLUSTRATION

DANESH MOHIUDDIN