By Tom Bradley
February 2016

An interest rate strategist at the Royal Bank of Scotland got his 15 minutes of fame recently when his fifty-five page report was translated into two words: “sell everything”. This powerful headline reverberated around the world.

I read the report, and am sympathetic to RBS’s gloomy view. I’ve been cautious for a while due mainly to the world’s addiction to what I call the “unsustainables” – near-zero interest rates, China’s growth and rising debt levels. Things that can’t last don’t provide a good foundation on which to build a portfolio.

But do I agree with the headline? No, not even close. Even if RBS’s bearish scenario was to play out, selling everything is not a winning strategy.

Those who get out of the market have to face the toughest question in investing: when and how to get back in. There are no signals or flashing lights at the bottom, the news on the front page of the paper will be abysmal, and investor sentiment will be extremely negative. I repeat: if you get out, it’s bloody hard to get back in.

Being uncomfortable with volatile markets is understandable, but if you’re planning on living another 20-50 years, you need to be willing to absorb some short-term ups and downs in order to earn a return above inflation, and build your wealth.

No matter how turbulent the markets get, it’s not enough to put your money into savings accounts and GICs in this period of near-zero interest rates. In fact, very few investors should have less than half their portfolio in stocks.

Broadly diversified portfolios have consistently served Canadian investors well. I’m not talking about ones focused on Canadian banks, real estate and resource stocks. But rather, portfolios that hold cash, government and corporate bonds, and small, medium and large companies across a range of industries, geographies and currencies.

Through all the turmoil last year, diversified portfolios had positive returns. They won’t always avoid market corrections, but as they did after the 2008 crisis and subsequent pullbacks, they recover.

Rather than thinking about getting out, you should focus on making sure your portfolio has a good balance for the long term. You might use your RRSP and TFSA contributions (it’s not the season to miss them) to adjust back to your long-term asset mix. Then after that, get ready to take advantage of cheaper valuations and extremely negative sentiment, both of which will set you up for higher returns in the future.

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