ARTICLES  &  REVIEWS

INVESTING RESPONSIBLY

London Free Press

 

You don't just live for today; you don't just live for yourself. You have family and responsibilities. Most of us don't just invest to make money but rather reach our goals and take care of those responsibilities like providing for our children's education, retiring comfortably (whatever comfortably means to us) and taking care of our parents if they need help and making sure that we have something to pass on to future generations.

There are two things that most often throw you off your plan and ultimately prevent you from making responsible decisions and they have been consistent factors throughout the 20th century: 1) market volatility and 2) background noise.

 

Peter Lynch, the Vice-Chairman of Fidelity Management and one of the best known managers for over twenty years in Boston, has suggested that with market volatility (the market moving up and down) it is always surprising how people are unprepared. There are statistics in the U.S. that the market has dropped ten percent or more over thirteen times in the last thirty years. In Canada the T.S.E. has dipped ten percent or more nine times over the last thirty years. But over the same thirty year period, the market has risen over fifteen fold in the U.S. and seven fold in Canada. So stay the course. Each time the market drops, and we always know it will, many investors panic and stray from their plan. In Canada the drop of over twenty percent at the end of August, 1998 was pretty scary. A lot of people did not like to see losses as they opened their statements. But if you have a plan and understand the risks associated with the market you won't react drastically and stray and stray from the course of responsible investing. Canadian investors who stayed the course over the following year were rewarded with a twenty-eight percent gain in the market. If you bailed out of your long term plan you probably did not fair as well.

 

The second factor is background noise. Background noise is the distractions, the news and the hype that can affect your investment decisions. There are one hundred and ninety-nine financial publications on the market, five full-time financial television stations and two hundred and twelve financial internet sites according to Oxbridge Communications study of 1999. It's just too much. How is anyone supposed to sort through all of this information and determine what is useful and what isn't. The constant flow of information doesn't help. Twenty years ago the evening news didn't even tell you what the market did that day. Now there is a constant ticker on several stations that give you the moment by moment values of markets. You'll find these televisions on factory floors, in offices and restaurants where people follow the action of the TSE, DOW and NASDAQ almost religiously. Is all this information helping you? What the market does hour by hour doesn't reflect the fundamentals of Walmart or Home Depot. The PC has been a boon to productivity in the workplace but many people are using it more often to watch their investments from a short-term perspective. Investing is a long-term making decisions based on minute by minute market reports is not what Peter Lynch would call responsible investing.

 

On every major recovery in the last thirty years if you've missed the best five days over that year you cut your return in half. The average recovery over a year from a bare market has been 27 per cent and if you miss the best five days over the year your return is cut to 13 percent.

 

Market timing doesn't work. The market doesn't make money every day. In fact the great stocks over time have had a lot of down days. The truth is if you're changing your long term plan with every little media reported blip or bump in the market you don't have a long term plan. There will always be some good news and some bad news. If you understand and expect the market to fluctuate and build your plan on that premise you will not give up your plan with every shift. Sure you should and can change your strategy and revisit your plan on a regular basis with your advisor but overall you should stay the course.

 

So while you're thinking long-term there are different factors to consider on whether you're just beginning to invest or you're close to retirement or you've already accumulated a substantial portfolio.