There are those who feel that the market has risen too far too fast. Some are predicting a double dip decline. For every view that the market is rising there is an equal number who feel the opposite will be reality. Let’s see if we can shed some light on the subject.
Most agree that markets move in cycles. The inexperienced investor always waits for the market to rise to new levels before investing. A sense of euphoria sets in at market highs. Caution is thrown to the wind. At that point the market has given all it’s going to give on the upside and is poised to turn downward. As the market declines the ride down is filled with the emotion of anxiety, fear and panic. The inexperienced investor sells – exactly when they should be buying.
So how do you feel about investing right now? If you say you’re not comfortable, you’re not alone. The vast majority of Canadians are still sitting on the fence waiting for the “right time” to invest. Bank account balances and short-term investments are at record levels. Yet by the end of 2009 the TSX index went up more than 50% from the lows recorded only a few months earlier. But it hasn’t reached new highs yet. So according to our market cycle analogy people continue to wait.
Clearly we are not at the excitement, thrill and euphoric stage of the market cycle. However we may have seen the bottom and are now on a new upward trajectory. The ride won’t be smooth. It never is. By keeping your emotions in check you should be more comfortable investing at this stage than any other.
The US estimates for GDP are 2.2% for the third quarter and 5.7% for the fourth quarter of 2009. Although not a perfect indicator of financial health, it is a definite improvement from the previous four quarters while the global economy was in recession.
So what should your investment strategy be right now? It really doesn’t matter whether we are talking about right now or last year or next year. The investment principle is the same at any time. First decide how much money you may need in the short-term and keep this money absolutely safe. Then decide if you want to keep any money aside for mid-term contingencies. This money may or may not have market exposure depending on whether you are flexible with your timing to draw the money out. As your time horizon narrows this money should be moved into the safe account. The remaining money is your long-term savings. That’s the money that should be working and invested for your future.
One thing to keep in mind is that the easy money may have been made last year. Most equities showed a high correlation during the decline of 2008 and the following recovery of 2009. It is not normal for the majority of equities to move in the same direction at the same time. If you’re investing in mutual funds you want to be selective about the fund manager you choose. You want a manager who is picky about the equities in the portfolio. You want a manager who has a flair for finding undervalued equities with good profitability prospects and then commit to your investment strategy for the long-term.
This is a monthly article on financial planning contributed by Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments. The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Rick Sutherland CLU, CFP, FDS, R.F.P., of FundEX Investments Inc. can be reached at 613-798-2421 or e-mail rick@invested-interest.ca.