10/16/2014 01:51 EDT | Updated 12/16/2014 05:59 EST

How should investors react to market swings? Keep calm and carry on, experts say

CALGARY - What's happening?

The Toronto stock market officially dove into correction territory this week. Earlier this week, the S&P/TSX composite index was off 12 per cent from highs reached in September, but was gaining back some of its losses by Thursday. The energy sector, which represents a significant chunk of the Canadian market, has borne the brunt of the downturn as oil prices have softened.

Michael Greenberg, portfolio manager for Franklin Templeton Solutions in Toronto, said there's nothing too unusual about the latest market volatility.

"We've had a great run in the market. We've not had a straight line up — we've definitely had some recoveries — but it's been quite some time since we had any sort of significant pullback in the equity markets," he said.

"So it's quite normal to have a couple of steps forward, one step back. We just haven't had that step back in quite some time, so this may have been a little bit overdue."

What is causing the latest downturn?

Worries that Germany, Europe's economic engine, may be heading into a recession have weighed on markets. Add to that economic worries in Japan and unimpressive growth in China.

Bill MacLachlan, director at Mawer Investment Management Ltd. in Calgary, also notes the "incredible" fall in oil prices, of particular concern to Canada's resource-driven economy. In Thursday trading, crude dropped below the US$80 threshold.

"Commodities have been under pressure for a while, but oil has come off dramatically... and that has a huge impact on the Canadian market in particular, but also it just shatters the confidence of the markets in terms of the kind of growth we're going to see in the overall economy," he said.

"One of the reasons oil has come off like a stone is that we're seeing signs that the global economy is slowing. The only bright spot is the U.S. Europe, which was for a long time in dire straits, had Germany to sort of hold it up above the water."

Then throw "human psychology" into the mix, with concerns over the spread of the Ebola virus and the ongoing situation with the Islamic State militants in Syria and Iraq.

"All these things together in the context of a market that's really done nothing but go up for significant amount of time," said MacLachlan. "So a correction of 10 or 12 per cent after the gains that we've seen in most markets over the past couple of years is not a real surprise, but the timing is always a surprise."

How should investors be reacting to the latest volatility?

Investors are likely feeling more than a little queasy after riding the stock market roller coaster ride.

But Adrian Mastracci, portfolio manager with KCM Wealth Management in Vancouver, recommends looking past the latest headlines of economic data or geopolitical woes.

"It causes a lot of anguish. People don't need anguish. Investing shouldn't be like that. Investing should be a little fun," he said.

Mastracci says investors should focus on a time horizon of at least five years, but preferably more, and accept that ups and downs are par for the course. And he advises his clients not to get too attached to particular investments.

Greenberg agrees is crucial investors keep their emotions in check.

"Many times, when investors are more likely to want to sell their investment, it's generally at the absolute wrong time. We saw the selling by retail investors in early '09 after the fact, after the big drawdowns, and that was obviously the wrong time to do that," he said.

Greenberg said the best thing an investor can do is work with an adviser to put together a well-diversified portfolio, and have a plan to put money into it on a regular basis.

Is there a silver lining for investors?

"We love these markets — seriously," said Mastracci. "I bought some things on sale."

John Stephenson, president and CEO of Stephenson & Company Capital Management, agrees market downturns mean an opportunity to pick up solid investments at a reasonable price.

Investors sitting on a pile of cash may want to wait until things settle a bit to make a move, he said.

"I think that's probably the prudent thing, but I think the reality is, I'm actually kind of excited because I look at valuation and I think it's become more attractive."

Stephenson said he likes "cyclical" stocks that tend to move in tandem with the overall economy.

"I think if you're willing to wade in on weakness, I'd be looking at some of the banks, I'd be looking at some of the insurance companies," he said. Manufacturers, like Magna International (TSX:MG) and Linamar Corp. (TSX:LNR), and airlines, like WestJet Airlines Ltd. (TSX:WJA) are also looking good to Stephenson.

"All of those are names that I think will do well when things heal. Will that be tomorrow or the next day? Probably not. But in another couple of months, I think we'll be happy about today," he said.

Stephenson's message to investors, in a nutshell: "This too shall pass. Not to worry."

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