In the world of the stock market there’s an old truism that you might have heard—as a general rule, markets take the escalator up and the elevator down. This refers to the tendency of stock markets to experience slow and steady growth over time, but sudden and sharp declines.
Escalator Up and Elevator Down
The "escalator up" refers to the gradual and consistent upward movement of stock prices over an extended period, such as years or decades. This gradual growth can be attributed to a combination of factors, including economic growth, increased profits, and investor confidence.
On the other hand, the "elevator down" refers to the sudden and rapid decline of stock prices, which can happen in a matter of days or even hours. This type of decline can be caused by various factors, including economic downturns, unexpected news or events, or changes in investor sentiment.
The phrase is a reminder that although investments can see long-term growth, they can also experience sudden and unexpected drops, which can be just as fast and unsettling as an elevator's descent. Investors should be prepared for market volatility and ensure their investment strategies are diversified and aligned with their long-term financial goals. When the stock market is on an upward trend, investors can make money simply by buying and holding stocks. This is because stock prices tend to rise over time, and investors who buy stocks when they are low and hold on to them for the long-term are likely to see their investments grow in value. This is often referred to as the "buy and hold" strategy, and it can be a simple and effective way to invest in the stock market.
Conversely, when the stock market is on a downward trend, investors may struggle to make money using the buy and hold strategy. In this scenario, it's important to take a more active approach to investing, such as using technical analysis to identify potential buying and selling opportunities or using a strategy such as dollar-cost averaging to invest in stocks over time.
Another important aspect to consider in the escalator/elevator analogy is the impact of emotions on investing. When the market is on an upward trend, investors may become overconfident and take on more risk than they can afford. On an escalator they can see /visualize the top. This can lead to overvaluation of assets and increased risk of a market crash. On the other hand, when the market is on a downward trend, investors may become fearful. As with an elevator down, they can’t necessarily see where the bottom is and they might panic and sell their investments at a loss, missing out on potential recovery. That's why it's important to have a well-defined investment strategy and a long-term perspective, and not to let emotions drive investment decisions.
Many buildings have both escalators and elevators. The stock market is inherently unpredictable, and investors should be prepared for the possibility of both upward and downward trends. The most important thing is to have a well-diversified portfolio and a long-term investment horizon. This will help to mitigate the impact of market volatility and increase the chances of achieving long-term financial goals.
So today while some investors have been on the elevator and frantically pushing the buttons to get off at the next floor, savvy investors accept that markets behave erratically from time to time and events such as the continuing instability caused by the pandemic, political turbulence, and the war in Ukraine have an affect upon the markets.
Even though market corrections can be stressful, they are very normal. But it does not mean that there are never things to be concerned about. Both interest rates and inflation are rising dramatically and this merits watching.
At the end of the day, it comes down to your risk tolerance. For some, this market correction might be a buying opportunity. For others, it might be a chance to take some money off the table and rebalance. For most though, it is likely a time to do nothing. The key to the decision though does not lie in a specific view on the markets, where interest rates may be headed, or how earnings and economic growth might play out. Instead, it starts with understanding ourselves.
If you have a long investment horizon ahead of you, have sources of income that can be reinvested for prolonged periods of time, or have a high-risk tolerance, this correction could be an opportunity. In fact, you might hope for it to continue because it will allow you to put more money to work at better prices.
When the stock market is on a downward trend
On the other end of the spectrum, there are those with shorter time horizons before they need to draw on their portfolios and/or individuals with low-risk tolerances. Despite the market being down it is not too late to re-balance if your stocks have strayed from your target asset allocation or to reassess your overall asset allocation by examining the types of losses you can endure without panicking.
Choosing what to ignore—turning off constant market updates, tuning out pundits spreading the latest doom and gloom—is critical to maintaining a long-term focus and reducing your stress.
Such drastic losses in the span of a few months, or even ongoing losses are difficult for clients to swallow. However, we encourage our clients to ignore the behavioural tendencies to react emotionally and instead pay attention to underlying, long-term fundamentals.
At CDSPI Advisory Services Inc. many of our Investment Advisors recommend a “cash wedge” to their clients who have concerns about the fluctuating markets. This means leaving money on “each floor on the way up” in safe investments like bonds and GICs. Whether or not this approach is right for you depends on your goals and the time horizon for your investments. Talk to one of our advisors who can help customize a financial plan tailored for you and determine whether this “cash wedge” or other strategies are the right fit for you and your unique goals.
Something to Think About
If you are 60 years old for example and maybe thinking about retirement, remember that you still have a long-term investment horizon; you may live until 90 which is still a 30-year timeline. And while RRSPs and RRIFs are there to help your retirement, you should still have short- and longer-term investment goals.
If you have recently begun your career and are just starting to invest, seeing the relatively small amount of money you have managed to save decline sharply in value may make you forget the long-term horizon you have for your investments and cause you to be overly cautious in the short-term costing you large potential gains in the future. It is possible to be too cautious and impede your longer-term goals.
Both these examples illustrate how talking to an advisor with an unbiased approach who will make recommendations based on your unique goals and objectives - both long and short term - can help. At CDSPI our advisors are all Certified Financial Planner® professionals and take a planning first approach to ensure our advice is based on your best interests and not ours.
The escalator up, elevator down analogy is a useful way to understand market swings. When the market is on an upward trend, it can be easy to make money using a buy and hold strategy. However, when the market is on a downward trend, it's important to take a more active approach to investing and not to let emotions drive investment decisions. By having a well-diversified portfolio and a long-term perspective, investors can increase their chances of achieving long-term financial goals, regardless of market conditions.
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The information contained in this article is of a general nature only and should not be considered as personal investment or financial advice. For specific advice about your situation, please consult with your financial advisor.