Do You Know Where Your Investments Are?
David Christianson, CFP, R.F.P., TEP
“Boy, I would not invest in these markets.”
Does that mean you would not invest because they have gone up too much, or because they are below where they were one year ago?
“I never like to invest at a market high, so I am holding onto cash now.”
Does a steep three-month rally, and a market that is still almost 30 percent below its peak constitute “high”? What would a “low” market look like?
“If I do not invest all my cash now, I am going to be left behind by the market recovery.”
Does that mean you always rush to invest every time the market goes up?
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These are just a few of the comments I have heard in the past few weeks about people’s investment intentions and the current state of the markets, made by advisors as well as individual investors.
Sometimes, they are based on research, current facts and a well thought-out strategy.
However, more often they are based on a misunderstanding of what has happened recently and an overreaction to the punitive market results of the last year.
For example, I have listened to investment advisors who made a lot of money for their clients in up markets by investing very aggressively, and then got their heads handed to them on a platter when the market crashed, and could not understand why.
They then went to cash at the bottom of the market and are now playing it safe, “until the markets settle down.” (What does that mean? Did they not notice we had three months of decreased volatility and a nearly steady climb?)
Many individual investors feel the same way. This is normal human nature, explained both by, “once bitten, twice shy,” and by the well-documented human need to avoid loss. (Healthy human beings avoid loss with something like twice the energy they use to seek gain.)
Let’s make one thing clear – I have no idea whether the markets will be higher one week from now, or one month from now, or even one year from now. I am not for a moment suggesting that I am better at predicting the future than anyone else.
For precisely that reason, everyone has to invest in a manner that is appropriate for them, with an acknowledgment that short-term market movements cannot consistently be predicted. However, I believe that longer term – five years and beyond – the stock markets will generally provide positive growth, especially if you are investing at a trough, rather than a peak.
So where are we now? If you are an investor, I think it’s important for you to have at least a general idea of how the markets have behaved recently.
The Toronto Stock Exchange (S&P TSX 300 index) closed June 30 at 10,375 points. This is up some 37% from the bottom of 7,567 reached March 9, 2009, but still down 31.2% from its June 18, 2008 peak of 15,073 points.
That second quarter rally was historic. People who invested at the zenith of fear and uncertainty in March have made a lot of money, even on “conservative” investments like preferred shares and corporate bonds. Common stocks in the info technology sector rose 58% from March 1 to June 30, financials soared 42%, and energy 35%.
On the other hand, more conservative sectors like utilities and consumer staples were close to flat, as the market’s appetite for risk started to return.
So, have we missed the rally? Is it too late to get back in? Or has the rally gone too far, too fast and is likely to correct?
I don’t know the answer, but here are some things I do know.
The investment markets did not die last fall. In the long run, the ownership of great companies is the most effective way to build wealth. Sometimes a company’s stock is overpriced, sometimes it is underpriced. It’s better to buy it when it is underpriced.
Most important, do what’s right for you, and don’t get fogged by website BS and the kind of half-baked clichés we quoted above.
The right time to invest is when you have extra money that you can commit to the market for the long term. Following that credo avoids worrying about whether this month is higher than next month will be.
Now, enjoy your summer.
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David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column, ‘Dollars & Sense’ appears Fridays in the Winnipeg Free Press.