5 questions to ask your advisor when markets are volatile

Markets have always had volatile moments in reaction to the economy. This happened with Black Monday in 1987, the Global Financial Crisis in 2008, and in 2020 with the COVID-19 pandemic. Rising interest rates, global political instability, climate change and other factors, can cause disruption in markets.

When markets are volatile, investments fall and rise rapidly and unpredictably. As hard as it may seem at the time, try not to make investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition decisions based on emotions such as fear or worry. Consider these best practices for managing volatilityVolatility The rate at which the price of a security increases or decreases for a given set of returns. A stock price that changes quickly and by a lot is more volatile. Volatility can be measured using standard deviation and beta.+ read full definition and questions to ask your advisor:

1. What should you do?

There isn’t one single way to respond to market fluctuations. You and your financial advisor should already have a financial planFinancial plan Your financial plan should cover every aspect of your finances: saving and investing, paying down debt, insurance, taxes, retirement planning and estate planning.+ read full definition that includes your short- and long-term goals. Revisiting this plan during a volatile market can help confirm if your plan still matches your financial goals and situation or provide an opportunity to make needed adjustments.

2. Should you reassess your risk tolerance?

Risk tolerance is your willingness and financial ability to handle investment losses. Some people can handle more changes to their portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition value than others. If your portfolio causes you stress, especially during a period of market volatility, you and your advisor can assess whether adjustments to reduce risk are needed.

Learn more about understanding risk tolerance.

3. Should you rebalance your portfolio?

Different types of investments can respond differently to market fluctuations. It can be tempting to rebalance based on changes. You and your advisor may determine that your portfolio should be rebalanced to help you meet your financial objectives and situation. This is a good opportunity to get an informed opinion before making a decision.

You could discuss with your advisor whether your investment allocations — such as between fixed incomeFixed income An investment that pays regular income to you. Examples: Guaranteed Investment Certificates, Canada Savings Bonds and types of other bonds.+ read full definition and equitiesEquities Another word for investments in the stock market.+ read full definition — is still appropriate and aligned with your risk tolerance, age, remaining working years, and goals. These objectives could include target income during retirement or expected returns upon your retirement date.

Also, it’s important to regularly discuss potential rebalancing of your portfolio to make sure it meets your goals, given that different assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition classes can produce different returns over time. This may be done periodically (e.g., twice a year) or using benchmarks (e.g., if an asset classAsset class A group of securities that have similar characteristics. Examples of asset classes include, such as stocks, bonds, real estate or cash.+ read full definition exceeds or declines beyond a certain threshold, say 20%). The key message is to have an ongoing dialogue with your financial advisor to ensure your portfolio takes into accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition any changes to your financial circumstances.

4. Should you buy (or sell) now?

The answer to this question is unique to each investor. Before you decide, discuss your financial goals, any changes in your life such as employment, marriage, children, and health with your financial advisor and the reasons for the specific tradeTrade The process where one person or party buys an investment from another.+ read full definition. They can help you assess whether you should act now or wait.

5. What happens if you withdraw from your investments?

This is especially important if you’re retired, close to retirement, or need the money due to job loss. An advisor will let you know of any penalties, redemption fees, or capital gains taxes or losses (if you hold a non-registered account) you may incur. They can also tell you whether the withdrawal will be taxable. For example, withdrawals from an RRSPRRSP See Registered Retirement Savings Plan.+ read full definition are taxable whereas from a TFSATFSA See Tax-Free Savings Account.+ read full definition they are not. If the reason for selling is financial hardship, ask your advisor if any penalties or redemption fees associated with the sale of an investment and its withdrawal can be waived.

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