Below you will find an interesting article from Globe Investor regarding the recent volatility in the markets to help keep things in perspective. If you are concerned about your current investments, I invite to to give us a call to review your portfolio, your risk tolerance and time horizon, and to see if your investment strategy still meets your investment goals.
Regular reviews are the best way to stay on track when it comes to financial planning. Reacting to the financial news, whether good or bad, has been proven to be a deterrence to financial success.
It's during times like this that we all need to keep things into perspective. The markets have dropped before. It’s only natural and they have always returned to new highs.
During the stock market crash of 1987, the Dow Jones industrial average plunged 22 per cent in one day. Less than two years later, it had recouped all of its losses. Five years later, it was up 41 per cent from its level before the crash. And 10 years later, it was up 253 per cent.
The worst thing that investors can do is sell their investments and get back into the markets at some point in the future.
This is called Market Timing and it is usually a losing strategy.
Do you think you can time the stock markets? (i.e. know when to buy and when to sell)
If you could have earned the return of the S&P/TSX Composite Index from Dec. 31, 1995 through Dec. 31, 2005, you would have compounded your money at an average annualized rate of 10.96%.
But…..if you had missed the 10 best days of stock market returns- only 10 days out of 2,510 days the market was open- your average return would have dropped to 6.69%.
If you missed the 40 best days, you would have lost money over the entire 10 years!
The best advice - Stay invested!
Last year (2006) Dalbar, a Boston based financial market research firm, released a report to an ongoing study that measures the effects of investor decisions to buy, sell and switch into and out of mutual funds since 1984.
The report looked at real investor returns from Jan. 1986 through Dec. 2005 and found that the average investor earned significantly less than mutual fund performance reports- a consequence of their buying and selling behaviour.
According to Dalbar, real returns for equity investors over those 20 years averaged 3.9%, while the average return for the S&P 500 over the same period was 11.9%.
The study's conclusion-"investment return is far more dependent on investor behaviour, than on fund performance. Mutual fund investors who hold their investments are more successful than those that time the market."
Anyway, the overall message is- focus on the long term - don't get caught up in the news headlines.
A 10-step recovery plan for panicked investors
John Heinzl
Thursday, August 16, 2007
Overcome by subprime sadness? Crying about the credit crunch?
You've come to the right place.
As a service to readers, the in-house therapeutic staff at Market Moves has designed a 10-step program to help you cope with the market mayhem.
Followed diligently, particularly when supplemented with a program of moderate alcohol consumption, these steps will allow you to ride out the current discombobulations with a smile on your face.
Look at our picture. We're smiling. And our portfolio is going down the tubes!
Step 1. Admit you're powerless over the stock market. Ever since man invented markets - it started with goats and cows and morphed into credit-default swaps and hybrid collateralized debt obligations - one thing has been constant: Prices go up, and they go down. Sometimes they go down hard. This short-term volatility is the price you pay for the long-term gains the stock market delivers. It's entirely normal.
Step 2. Stick with quality. Financial stocks have been getting creamed as investors worry about the fallout from the credit squeeze. But any losses our banks incur would be mere paper cuts compared with the billions in profit they pull down annually. "We continue to remind investors that Canadian banks have extremely strong capital ratios," said analyst Ian de Verteuill at BMO Nesbitt Burns.
Step 3. Buy stocks with rising dividends. When markets are going to hell, there's nothing like a dividend cheque to cheer you up - especially when the cheques gets bigger every year. Banks, insurers, pipelines and some REITs are examples of companies that excel in this respect.
Step 4. Double-up on your mortgage payment. If buying stocks makes you nervous right now, take the money you would have otherwise invested and pay down the mortgage. You'll generate an after-tax return equal to the interest rate on your home loan. And, unlike asset-backed commercial paper, it's guaranteed.
Step 5. Make an RRSP contribution. By putting money into your RRSP now, you'll avoid the February rush and prevent yourself from squandering the cash on a 51-inch LCD TV. That's what the tax refund is for.
Step 6. Stay positive. Yes, it's scary out there. Ooooo, scary! But it's not all doom and gloom, folks. Yesterday, H.J. Heinz and Deere & Co. both posted profits that topped estimates, giving their stocks a boost. In another positive sign, U.S. consumer prices rose just 0.1 per cent in July - the smallest increase in a year.
Step 7. Remember that this, too, shall pass. During the stock market crash of 1987, the Dow Jones industrial average plunged 22 per cent in one day. Less than two years later, it had recouped all of its losses. Five years later, it was up 41 per cent from its level before the crash. And 10 years later, it was up 253 per cent.
Step 8. Focus on the long term. Check out the chart of Royal Bank. Do you think folks who bought 10 years ago are worried about the latest hiccup? No, they're too busy picking out a fall wardrobe at Holt's.
Step 9. Resist the urge to check share prices every 30 seconds. If you invest in solid businesses, just hold them and forget about it. Checking prices will only give you an ulcer. Okay, just one more time.
Step 10. Give yourself a break. Go for a walk. Listen to Hall and Oates on your iPod. Make a new friend on Facebook. Anything to get your mind off the market.
Everything's gonna be okay, really. But you have to follow the program.
jheinzl@globeandmail.com
© The Globe and Mail
