The Whipsaw of Market Chaos
Before the days of gas-powered chainsaws, lumberjacks relied on a tool called a whipsaw to cut large logs. The whipsaw was a long metal blade with handles on both ends, requiring two people to push and pull in opposite directions to make a cut. It looked chaotic—a constant back-and-forth of opposing forces. But that chaos created progress, turning logs into useful lumber.
Today, the term “whipsawing” describes the chaotic back-and-forth action we often see in the stock market. One moment, the market is up, and the next, it’s down. These wild swings can make you feel like you’re on a roller coaster—one minute optimistic, the next filled with fear.
What causes this chaos in the market? It’s a push and pull of opposing forces: on one side, optimism for growth fuelled by rising oil prices or a post-pandemic economic recovery; on the other side, fear of inflation, rising interest rates, or even global events like war.
It’s enough to make anyone feel anxious about investing. But here’s the truth: you don’t have to ride this emotional roller coaster. In fact, there’s a much simpler, smarter way to invest for your future.
The Emotional Roller Coaster of Investing
When the stock market whipsaws, it’s not just the numbers on your screen going up and down—it’s your emotions too. Imagine checking your portfolio one day and seeing your investments up 10%. You feel great, optimistic about the future, maybe even tempted to buy more. But the next day, your portfolio is down 15%, and suddenly you’re filled with fear, questioning every decision.
This emotional roller coaster is exhausting, and it can lead to impulsive decisions. When the market is up, you might feel pressure to buy, thinking you’re missing out. When it’s down, you might panic and sell, fearing bigger losses. This is a trap that many investors fall into—buying high and selling low, driven by emotions rather than a solid strategy.
What’s Really Driving the Market?
Let’s look at the forces behind this whipsawing market. The rising price of oil, for example, creates optimism for economic growth, especially in industries that rely on energy. But as oil prices go up, so does inflation. To combat inflation, central banks raise interest rates, which can slow down growth and make borrowing more expensive.
On a larger scale, global events like the war in Ukraine or sanctions against major countries can disrupt supply chains, affecting everything from food to technology. And let’s not forget the lingering effects of the pandemic, including the possibility of new strains of COVID-19 that could disrupt the economy all over again.
All of these factors create uncertainty. Investors don’t like uncertainty, and their fear drives them to make rash decisions—buying when they feel hopeful and selling when they’re scared.
The Key to Avoiding the Whipsaw: Think Long-Term
The secret to avoiding the emotional roller coaster and the chaos of the whipsawing market is simple: think long term. When you’re investing for retirement or another major life goal, you’re planning with a 20, 30, or even 40-year time horizon. The day-to-day swings in the market are insignificant over such a long period.
History shows us that the market has always recovered from downturns. Whether it’s a pandemic, a recession, or rising interest rates, these events are temporary. What matters is that you have a solid plan and stick to it.
Simplicity is the Best Strategy
You might be wondering if there’s a way to invest without constantly worrying about the market’s ups and downs. The answer is yes, and it’s simpler than you might think.
The best solution I’ve found for long-term investing is the exchange-traded fund (ETF). An ETF is a type of investment fund that holds a mix of stocks, bonds, or other assets, and is designed to follow a set formula. Some ETFs are designed to track major stock market indexes like the S&P 500, while others focus on specific sectors or regions.
The beauty of ETFs is that they take the guesswork out of investing. You don’t have to pick individual stocks or worry about timing the market. You simply buy shares of an ETF and hold onto them for the long term. Over time, these investments grow, and because ETFs are diversified, they spread out risk across different companies and industries.
Why ETFs are the Perfect Investment for Canadians
For Canadian investors, ETFs (Exchange Traded Funds) offer a unique advantage. Most of the major Canadian banks offer ETFs, and you can easily purchase them through a discount brokerage account. Many of these funds are also designed with low management fees, which means more of your money stays invested, rather than going to fees.
Another advantage is that many ETFs include a mix of Canadian and international stocks, allowing you to diversify your investments across different markets. This is important because while the Canadian market is strong in areas like banking and natural resources, international exposure gives you access to industries that are growing in other parts of the world, such as technology and healthcare.
More on why David likes ETFs Investing Made as Easy As One Two Three
The Importance of Low Fees
One of the reasons ETFs are so effective for long-term investing is their low fees. Many actively managed mutual funds charge high management fees, which can eat away at your returns over time. These fees may not seem like a big deal in the short term, but over decades, they can make a significant difference in how much your investments grow.
Let’s say you invest $10,000 in an actively managed fund that charges a 2% management fee, and your friend invests the same amount in an ETF with a 0.2% fee. Over 30 years, assuming both investments earn an average annual return of 7%, the difference in fees will cost you tens of thousands of dollars. That’s money you could have used for your retirement or other goals.
$10,000 invested at net 7% return for 30 years yields $81,164
$10,000 invested at net 5% (7%-2% fees) return for 30 years yields $44,677
Just a 2% difference for 30 years can almost double your money!
Consistency is Key: Invest Regularly
Investing is not about getting rich quick. It’s about building wealth steadily over time. One of the best ways to do this is by investing regularly. This strategy is known as dollar-cost averaging, and it’s a great way to take advantage of market volatility without letting your emotions get in the way.
With dollar-cost averaging, you invest a fixed amount of money at regular intervals, regardless of whether the market is up or down. This means you’ll buy more shares when prices are low and fewer shares when prices are high. Over time, this strategy helps to smooth out the highs and lows of the market, reducing the impact of volatility on your investments.
For example, if you set aside $200 each month to invest in an ETF, you’ll be building your portfolio steadily without worrying about timing the market. Some months, the price of the ETF will be higher, and other months it will be lower. But over the long term, you’ll benefit from the overall growth of the market.
Forbes has a more detailed explanation of dollar cost averaging How To Invest with Dollar Cost Averaging.
The Power of Compound Growth
One of the reasons long-term investing is so effective is the power of compound growth. When you invest, your money earns returns. Those returns, in turn, earn their own returns, and the process repeats, creating a snowball effect.
Let’s say you invest $5,000 in an ETF, and it earns an average return of 7% per year. After one year, you’ll have $5,350. But in the second year, you’ll earn 7% on the new total, not just your original $5,000. Over time, this compounding effect can turn even small investments into substantial wealth.
$5,000 invested at 7% for 20 years at:
Simple Interest yields $7,000 in interest.
Compound Interest yields $15,193 in interest, more than double the interest you would receive from simple interest!
The key to making the most of compound growth is time. The longer you leave your money invested, the more time it has to grow. That’s why it’s so important to start investing as early as possible, even if you can only afford to invest a small amount each month.
If you would like a more detailed explanation of simple interest vs compound interest, read what Investopedia has to say Simple vs. Compound Interest: Definition and Formulas.
Stay the Course
The hardest part of investing is often staying the course when the market gets rough. When you see your portfolio’s value drop, it’s natural to feel anxious. But remember, market downturns are temporary. The best thing you can do is stick to your plan, continue investing regularly, and focus on the long-term growth of your portfolio.
Warren Buffett, Chairman, Berkshire Hathaway, one of the world’s most successful investors, is famous for saying that the stock market is a device for transferring money from the impatient to the patient. If you can stay patient, ignore the short-term noise, and keep your eyes on your long-term goals, you’ll be in a much stronger position to achieve financial success.
Take Control of Your Future
Investing doesn’t have to be complicated or stressful. By choosing a simple strategy like investing in ETFs and sticking to it over the long term, you can avoid the emotional roller coaster of the whipsawing market and set yourself up for financial security.
Remember, the key to successful investing is not timing the market, but time in the market. Start today, stay consistent, and let your investments grow. Your future self will thank you.
In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.
Disclaimer for ManageYourMoney.ca
The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.
As always, we are not a qualified financial advisors. We just relate financial management to our own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of ours came from expensive experiences.
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