We have had enough market volatility during 2008 to last a lifetime. As stock markets began a swift decline investors started to make panicked decisions, switching investments, changing advisors and altering their investment objectives. They may have become their own worst enemy. For many, discipline was overcome by fear. Thus, while thinking they were in control, they were actually losing control. These emotionally charged decisions might end up costing a bundle over the long-term.
We know that not everyone was panicking. Warren Buffett, touted as the most successful investor of our time, invested billions into distressed companies during the market set back. Is he crazy? Has he lost his touch? We don’t think so. Mr. Buffett did what he does best. He saw an opportunity and capitalized on it. He will no doubt multiply his investment multi-fold over the next few years.
You’ve heard it before and we’ll say it again. The path to investment success is to buy low and sell high. However, although this concept seems relatively simple to comprehend, putting it into practice can be quite difficult for some investors during a volatile market. Redemption rates are typically at their highest levels when markets are on the extreme negative side. The result is that frightened investors receive a very low price for their shares. Once the market is back on the up swing, money tends to resurface as investors are buying back at higher prices. Does this make sense? You pay $10 a share and sell at $5 a share, and then buy back at $10 a share. As markets improve it becomes clear that the anxious investor may have been better served by inaction alone.
For instance, during 2001 to 2003, the Canadian market fell 43%. Investors who fled during this period missed out on the profits of the market returning at 163% over the next few years. A key factor to consider is that the markets tend to go up more often then they go down.
All this is not to say hang in at any, and all costs. If your time horizon for needing your money is short, less than a year, then you probably should not be in the market at all. Typically you need at least three to four years at a minimum with the ability to buy during times of market weakness in order to have success with your investment strategy.
Investors must accept the reality that markets go down as well as up. You must be prepared for this at all times. This current financial crisis will eventually end and more normal markets will return. The best course of action is to review your investment strategy, time horizon and objectives. Confirm that your current asset allocation is consistent with your investment strategy. If not, then make adjustments. If it is, then stay the course and consider making further investments at these low prices.
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. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of FundEX Investments Inc. to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca.