Comments on World Events

We are often asked to give our views and comment on the current media headlines and world events. While we are humbled and honoured by this request, we are neither an economist nor a market timer. We cannot gaze into a crystal ball and predict the future. Therefore we cannot comment directly on how the European sovereign debt crisis, the US fiscal deficit or the inflationary pressure on emerging markets will affect us. And we certainly cannot tell you precisely how or when these problems will go away. We don’t believe anyone can. The one thing we can tell you is that similar events have occurred in the past and every time, without exception, they have been resolved.

The media has a propensity to report these events to the public with apocalyptic headlines and speculation of the incipient end of the world. The public then extrapolates these headlines and begins to believe in the four most dangerous words of investing, “It’s different this time.” After all, how could the whole world be wrong? Everybody is saying the same thing so it must be true.

It is important to note that the role of a financial planner is not to speculate on how the current debt crisis in Europe or the deficit in the USA will affect people and more specifically their savings and investments. The financial planner’s role is to assist people to build long-term savings and investment portfolios. These programs address real people with real life goals. Typical goals may include the desire to retire comfortably, educate children, buy a house, pay off a mortgage, and perhaps leave a legacy. Oh and yes there are usually some goals that add to the enjoyment of life, for example to take an annual vacation or buy a big screen TV.

A long-term investment portfolio is not based on any market or economic outlook. It is based on historic returns of the asset classes used to build the portfolio. Typically the asset classes include fixed income (bonds) and equities (stocks). The assets are weighted and matched to a person’s time horizon and risk profile.

With all our conviction we try to avoid making changes based on current economic and market speculations that are widely publicized in the press. The only time that a significant portfolio adjustment is required is when a person has changed their goals. If your goals have not changed then the portfolio constructed should stand the test of time.

Let’s take a stroll over my entire lifetime, and I’m sure the lifetime of many of the readers of this short essay. There have been at least seven serious market crises when the news headlines scared the wits out of most investors. The Suez Crisis, Jul. ’56 to Dec. ’57 saw a decline of 30% over those 17 months. During the OPEC Oil Shock from Oct. ’73 to Sept. ’74 the decline was about 37% over an eleven month period. Then there was the Savings and Loan crisis from Nov. ’80 to Jun. ‘82 when another decline of 43% in was seen over nineteen months. The Russian Ruble crisis from Apr. ’98 to Aug. ’98 took away 28% in four months. Many will remember the Tech Bubble from Aug. ’00 to Sep. ’02 when the decline was 25% over a 25 month period. Finally the more recent Financial Crisis from May’08 to Mar, ’09 saw a decline of 45% in eleven months. And we are now dealing with the Greek debt crisis. Who knows how or when this one will end.

Even with the current state of the equity markets you must concede that it is up almost ten times over the past thirty years. This is despite the fact that there have been multiple “end of the world” scenarios depicted in the press that were dealt with over that time period.

Here are some final comments about media-hyped current events. Speak to your financial planner about building real portfolios that are designed to meet real life goals. Don’t allow short-term market swings to dictate your investment strategy. If you do, it may lead to manic depression.

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., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail Mutual Funds provided through FundEX Investments Inc.

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