Let’s start with a metaphor. Your financial strategy is a bit like driving your car. You have a destination; let’s call it Retirement City. You plan your route to get from here to there. This is your savings and investment strategy. You know there will be traffic, bumps on the road, stop lights, highways and maybe even a crazy driver who will cut you off along the way. These are uncontrollable factors much like economic and financial events and life circumstances. Knowing your driving skill, you are confident you will arrive safely at Retirement City.
Now, can you imagine if you tried to make this journey by driving backwards only looking into your rear view mirror? It doesn’t take much imagination to know that you would not attempt to make this journey by only looking in your rear view mirror. Yet many investment decisions are based on recent short-term events. The assumption being that what happened recently will surely happen again. However that’s the past and you are looking into our rear view mirror with this strategy.
Over the past twelve months we have seen enough ups and downs in the markets to last a lifetime. Volatile markets often tempt investors into making financial mistakes. They sell their current “dogs”, perceived as poor investments because they went down, and switch into the next “hot” stock, mutual fund or other investment tip that has showed recent strong performance.
Using short-term trends to support decisions for a long-term investment strategy could be a mistake. No one knows what’s over the next hill or can predict the future. By making snap investment decisions based on recent short-term performance you could find yourself selling, only to determine later that you should have been doing exactly the opposite and buying.
As an investor you have certainly heard the disclaimer “past performance does not guarantee future results.” This becomes clear when we look at a Lipper study of the top quartile large cap US equity mutual funds from 1998 to 2002. The study followed the performance of these funds over the following four years. Only 19% stayed top quartile. Another 25% slipped to second quartile. While 32% of those top performing funds fell into third quartile and the last 24% fell all the way into fourth quartile ranking.
You can’t control the journey to Retirement City, just like you do not know how the economy or financial markets will behave. With proper coaching and discipline you can control your emotion and commit to a financial strategy that is crafted to meet your long-term needs and goals.
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