The definition of investment performance can be very subjective and — depending on the investor — can be based on goals, timelines or perspectives. However, focusing too narrowly on short-term results and missing the larger picture can lead investors to make decisions that have a negative impact on their long-term success.
Therefore, it’s really important to understand that investment performance can be shaped by a wide range of factors.
Let’s take a look at some of the key influences on investment performance, such as economic drivers, market conditions, company-specific fundamentals, investment strategies, market cycles and behavioural factors. We’ll also examine how good financial advice is crucial to maximizing investment performance.
Economic factors
The broader economy has a significant influence on how stock markets behave. Key economic indicators, such as interest rates, inflation and GDP growth, often drive market trends and shape asset prices.
Interest rates: central banks, such as the U.S. Federal Reserve, Bank of Canada and the European Central Bank, use interest rate policies to control inflation and stimulate economic growth. Changes in interest rates can have wide-reaching effects on equity and bond markets.
When interest rates rise, so do borrowing costs, which can reduce corporate profits and negatively impact stock prices. At the same time, bond yields typically rise, which can make fixed-income investments more attractive than stocks.
Inflation: inflation measures the increase in the price of goods and services over time, and it affects different types of assets in a variety of ways. For example, equities may perform well during moderate inflationary periods, as companies pass higher costs on to consumers. However, high inflation can erode purchasing power and negatively affect both stocks and bonds.
The chart below illustrates the recent impact inflation had on the U.S. stock market. In 2022, when inflation began to increase significantly, the U.S. stock market reacted inversely and fell in value. When inflation began to subside in 2023, the stock market began to recover.
GDP growth: gross domestic product (GDP) growth is a measure of economic activity and is closely linked to corporate earnings. Strong GDP growth typically leads to higher corporate profits, which in turn boost stock prices.
Market conditions
Several external factors have an impact on short- and long-term investment performance. These can include market sentiment, global events and sector-specific dynamics. These conditions often introduce volatility and uncertainty but can also present opportunities, as markets have always moved on to reach new heights.
Market sentiment: investor confidence — or the lack thereof — often drives short-term price fluctuations. Market sentiment can be influenced by news, earnings reports and macroeconomic indicators. When sentiment is positive, investors are more likely to buy stocks, which drives prices higher. Conversely, fear or uncertainty can lead to widespread selling.
Global events: events like geopolitical conflicts, natural disasters or pandemics can significantly impact global markets. The COVID-19 pandemic, for example, caused a sharp downturn in global stock markets in early 2020, but markets recovered as governments provided economic stimulus and companies adapted to new realities.
Sector rotation: different sectors of the economy (for example, technology, health care and energy) perform differently based on market conditions and economic cycles. For example, technology stocks might outperform during economic expansions, while defensive sectors like health care and utilities may perform better during downturns.
Investment strategy
An investor’s approach to managing their portfolio — choosing active or passive management, how they allocate assets and how they manage risk — also plays a significant role in determining investment performance.
Active versus passive management
Active management involves making strategic investment decisions designed to outperform the market, while passive management aims to mimic the performance of specific market indices.
Asset allocation
A well-diversified portfolio that balances stocks, bonds and alternative assets can help manage risk and enhance returns. Asset allocation ensures that a portfolio is aligned with an investor’s risk tolerance and financial goals.
Risk management: managing risk through strategies like hedging, diversification and downside protection is key to preserving capital. Risk-adjusted return metrics like the Sharpe ratio help investors assess how much return they’re earning for the risk they’re taking.
Market cycles
The cyclical nature of markets, including bull and bear phases, has a major impact on investment performance. Understanding these cycles helps investors make more informed decisions.
Bull and bear markets: bull markets are characterized by rising prices and investor optimism, while bear markets are marked by falling prices and widespread pessimism. Recognizing these trends is important for timing investment decisions and managing risk.
Recessions and recoveries: recessions often lead to declines in corporate earnings and stock prices, while recoveries present opportunities for investors as markets rebound. Some assets, such as bonds or defensive stocks, tend to perform better during recessions, while cyclical stocks often outperform during recoveries.
External Influences: government policy, regulations, technological advancements and environmental trends are external factors that shape market performance. For example, fiscal policy, tax laws and regulation changes can significantly impact different industries.
Behavioural factors
Investor psychology and behaviour play a crucial role in driving investment performance. Emotional decision-making and attempts to time the market can often lead to poor outcomes.
Investor psychology: emotions like fear and greed often cause investors to make irrational decisions, leading to buying high during euphoric markets or selling low during panics. Behavioral finance seeks to understand and mitigate these tendencies.
Market timing: attempting to time the market (buying and selling based on short-term predictions) can lead to missed opportunities and lower returns. Data shows that long-term, consistent investing typically outperforms market timing strategies.
Why are behavioural factors so critical for investors? They often drive poor decision-making, particularly when emotions take over, leading to impulsive reactions. As the chart below illustrates, investors tend to buy more when the markets are high and sell when they drop.
The role of financial advice
Financial advice plays a critical role in helping investors navigate these drivers of investment performance, offering personalized strategies, ongoing portfolio management and being an emotional buffer when it comes to decision-making.
Tailored investment strategies: financial advisors can help create tailored investment strategies based on your risk tolerance, time horizon and financial goals, ensuring the right mix of investments for long-term success, which evolves alongside your life.
Performance monitoring and rebalancing: regular performance reviews and portfolio rebalancing are essential for maintaining alignment with financial objectives. Advisors help ensure that portfolios remain diversified and appropriately positioned to weather market changes.
Emotional buffer: a financial advisor can provide steady, objective guidance to help navigate investment decisions.
The advantages of professional money management
A well-diversified portfolio is essential for managing risk and enhancing returns, and professional money managers play a crucial role in achieving this balance. These experts have the knowledge and resources to analyze and respond to the various factors impacting investment performance as outlined above.
Professional money managers actively monitor the market, adjusting portfolios as needed to take advantage of opportunities and mitigate risks. This hands-on oversight is key to navigating the complexities of investing and achieving sustained success in a dynamic market environment.
Having the performance conversation
Your IG Advisor will take the time to explain the investment performance of your portfolio, the factors driving its results and whether your portfolio remains aligned with your integrated financial plan and your goals. They’ll also make suggestions for any necessary changes.
If you have any questions regarding your investments’ performance, don’t hesitate to reach out to your IG Advisor. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Advisor.
Mutual funds and investment products and services are offered through Investors Group Financial Services Inc. (in Québec, a Financial Services firm). Additional investment products and brokerage services are offered through Investors Group Securities Inc. (in Québec, a firm in Financial Planning). Investors Group Securities Inc. is a member of the Canadian Investor Protection Fund.
