Get used to volatility: BMO says it’s the “new normal”

Majority of Canadian investors feel volatility is here to stay.



Online only.


A study coming out today from BMO Global Asset Management says 77% of Canadian investors feel market volatility is the “new normal” and here to stay. Virtually all (96%) of the 1,002 that were polled online early this year believe balancing investment risk is important. Major factors involved in this are long-term rate of return (95%); diversification (86%) and short-term rate of return (72%).

Uppermost in investors’ minds are considerations like stretched stock valuations, weaning of monetary policy support from central banks and emerging market liquidity strains. As a result, BMO chief investment officer Paul Taylor expects volatility will continue for at least another year or two.

Retiring boomers especially sensitive to this volatility

Those near retirement need to pay special attention to this. In a press release, BMO singles out baby boomers approaching retirement, urging them to focus on reducing risk and “take a more conservative investing approach to preserve their nest egg.” Most will need help with this: the survey found 80% believe they could use assistance finding their ideal level of investment risk, while 85% need help finding investments suitable for the risk level with which they’d be comfortable. Naturally, BMO has some inhouse solutions you can find in its release here.

In practice, this appears to vindicate the role taken by traditional investment advisers and financial planners. I remind readers of MoneySense‘s online directory of fee-only planners, which was overhauled last fall to cover two major categories: true fee-for-service planners who bill by the hour or project; and the more common “asset-based” planners or advisers who will levy an annual fee that is a percentage of client assets (typically 1%).

Volatility is part of investing and always has been

As for chronic volatility, seasoned investors might quip “’twas every thus.” The Bible has stated that “the poor will always be with us” and you could argue the bible of investing (whatever that might be) similarly should state “volatility will always be with us.”  This is why our magazine continually preaches the need for asset allocation,  diversification and risk-coping strategies like dollar-cost averaging.

The financial industry is built around the premise that stocks provide the best returns over the long run but that the price paid for those returns is enduring short-term volatility. It’s hard to recall a time when stocks were not volatile, which is why most planners counsel that stocks are appropriate for those with a time horizon of at least five years. Those needing money for education, home downpayments or other short-term savings goals under five years should look to low-yielding fixed-income solutions, which are covered every issue of MoneySense by our fixed-income columnist Pat Bolland, including a special feature here in the current issue. Even here, and as BMO points out, there will be volatility in fixed-income markets as the Federal Reserve’s QE tapering program progresses through the rest of the year.

Finally, one ancient piece of culinary advice that applies equally well to investing: “If you can’t stand the heat, stay out of the kitchen.” These days, avoiding the heat would mean settling for GICs (CDs in the US) or Canada Savings Bonds or equivalents, which in return means accepting a zero or negative real return after inflation and taxes are factored in. When it comes to volatility, the Fram oil filter ads come to mind: “You can pay me now or you can pay me later.










One comment on “Get used to volatility: BMO says it’s the “new normal”

  1. There are simple lessons that individual investors can keep in mind to make living with volatility more bearable.

    1. Don’t make presumptions.

    2. Someone is buying. Those people are often the long-term investors.

    3. Market timing is hard. Market recoveries can come just as quickly and just as violently as the prior correction.

    4. Never forget the power of diversification. Diversification spreads risk and can lessen the bumps in the road.

    5. Markets and economies are different things.

    6. Nothing lasts forever. Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.

    7. Discipline is rewarded. The market volatility is worrisome, no doubt. The feelings being generated are completely understandable. But through discipline, diversification and understanding how markets work, the ride can be made bearable. At some point, value will re-emerge, risk appetites will re-awaken and for those who acknowledged their emotions without acting on them, relief will replace anxiety.

    Jim Parker DFA


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