ARTICLES  &  REVIEWS

Perspective

London Free Press

 

These are tough times that require discipline and resolve.  We have seen them before, and we will see them again.  Approximately once every five years, the market does correct by 20%. Since WWII, there have been 13 bear markets; the average decline has been 32% and these declines, on average, have lasted 16 months.  On the positive side, the average expansion or rise in the markets is 161% growth, lasting 59 months.

 

In the face of all the bad news which the media is getting extremely good at promoting, it may seem logical to sell assets with any perceived risk and put your money under the mattress.  However, history shows the markets tend to recover before economies do, and recessions can actually be a fruitful time to invest.  Also, when markets move they tend to move rapidly and many opportunities are missed by those who are not in the market.  If you are like most investors, you began your investment program with the intent of achieving a number of goals - some long-term, others shorter-term, such as enjoying a comfortable retirement, sending your children to college, buying a second home or supporting your current lifestyle.  You have invested in stocks and bonds to steadily build and preserve wealth over decades.  Your long-term strategy did not include trying to jump in and out of the market, based on its short-term performance.

 

Despite periods of stomach-churning activity, stocks ended 2007 with a decent return. But an impulsive investor who abandoned the market during one-or-more of its sharp downturns would have missed the strong, ensuing rebounds.  Studies have shown that an individual fully-invested from 1975 to 2007 in the TSX Composite Index, a measurement of Canadian companies, would have returned earned 12% compounded annually.  Had they missed the best 50 months of that time period, they would have had a negative return. 

 

When it comes to investing, what's the biggest risk of all - market risk, company risk, interest rate risk, credit risk, inflation risk?  No, for many investors the biggest risk is quite fundamentally investor behaviour. Because losing money can provide a powerful visceral reaction, some investors turn to market timing - buying or selling a security based on future price predictions.  But choosing when to invest or “time the market” is difficult.  Investors who attempt to "time the market"  may run the risk of missing periods of exceptional returns.  Clearly, market-timing can seriously diminish long-term performance if market volatility isn't managed properly. On the other hand, volatility provides investors with an opportunity to buy stocks and mutual funds at attractive prices.

In summary:

 

• Have a “professional institutional style” portfolio that is continually managed and aligned with your risk behavior.
• Focus on real returns, your after-tax returns, using tax-efficient “Corporate Class” for  non-registered investments outside of your RRSP's. The Corporate Class converts interest and foreign income into Capital Gains and reduces distributions by carrying forward capital losses, something traditional investment funds that are structured as “trusts” cannot do.
• Look to an investment program with fair and reasonable management fees.
• Stay clear of DSC or “deferred sales charge” funds. They are a ball-and-chain around your investments, and reduce your ability to make adjustments should a fund manager or a fund company have a material change of performance.

 

While no one knows if there will be less turbulence ahead, there is light at the end of the tunnel. Historically bear markets do not end on good news, they end on bad news. Of the last six bull markets going back 30 years, the average return was 140%. Those bull markets started in environments just like today.