The current bull market, often referred to as the Roaring 2020s, is a historic opportunity that investors should not overlook. Despite the global chaos and uncertainty, the stock market has been on a remarkable uptrend, with Canadian and U.S. equity benchmarks soaring by approximately 140% since late 2019. This bull market, which began in 2009, has already generated impressive annual returns of 17% for the S&P 500 and 13% for the S&P/TSX Composite Index, including dividends. However, many Canadian investors have missed out on these substantial gains due to various factors.
One of the primary reasons for underperformance is the tendency to overthink and overreact. Investors often bail out of the market during periods of crisis, such as the pandemic, global supply chain collapse, inflation, and energy security crises. While these events may seem daunting, they present opportunities to get on the bandwagon. The retail investor experience, as measured by U.S. research firm Dalbar, has consistently shown that investors often miss out on significant returns due to their inability to stomach the market's volatility. Dalbar estimates that American equity-fund investors have sacrificed around a quarter of the S&P 500's returns over the past decade.
To make the most of this bull market, investors should consider a minimalist buy-and-hold strategy. This approach, often referred to as 'VOO and chill,' involves investing in major index funds and ignoring market noise. By driving investment fees to near-zero levels, investors can capture the market's upside without the stress of market timing. For Canadian investors, the iShares Core Equity ETF Portfolio or similar funds are suitable options. This passive approach is particularly beneficial for those with a long-term investing horizon, as it allows the magic of compounding to work its wonders.
However, it's important to note that this strategy is not widely adopted in Canada. According to a PWL Capital report, passively managed stock funds account for only 23% of the market share in Canada. Most investors prefer actively managed funds, which, ironically, tend to underperform their passive counterparts. The fees associated with actively managed funds are significantly higher, often more than quadruple those of passive funds.
Another challenge investors face is the fear of market sell-offs. Watching their money disappear during corrections can be distressing. However, enduring these corrections is crucial, as it often leads to substantial rewards. Investors who panic and retreat during market downturns face the difficult decision of when to re-enter the market. Missing out on the market's record-highs can be frustrating, but research shows that investing at market peaks can still yield excellent long-term returns.
In conclusion, the current bull market presents a unique opportunity for investors to capitalize on substantial gains. While it may be tempting to overthink and bail out during periods of crisis, a minimalist buy-and-hold strategy can help investors make the most of this historic bull market. By ignoring market noise and focusing on long-term gains, investors can avoid the pitfalls of overreacting and potentially miss out on a generational opportunity.
