Should I do anything different with my investments?
Whenever we find ourselves in uncertain economic times, inevitably we always ask ourselves one question: Should I do anything different with my investments?
Unfortunately, in most cases, the knee-jerk reaction of do-it-yourself investors is to overreact, when just the opposite is called for – easier said than done. Anyone can maintain perspective when the markets are going well, but the individual who heeds professional advice and manages to adhere to sound investing philosophies in good times as in bad will finish on top.
When times are tough, many investors are inclined to simply stop investing with the intention of avoiding further losses and wait until the markets have returned to higher levels before investing further. Ironically, history shows that market downturns are exactly the best time to invest in equities since most of them are “on sale” relative to the higher prices they traded for in previous periods – a buying opportunity that too often goes unrealized. By the time investors decide to get back into the game, it’s often too late and they end up paying higher prices for their investment products.
We all try to “buy low and sell high”, but does anyone other than professional money managers really successfully do this? Aside from the fact that predicting peaks and valleys in the market is impossible, the problem is few individual investors ever sell when “high” because they don’t want to miss out on returns should they go even higher. In the end, those investors often end up selling while the value is decreasing, effectively “buying high and selling low” – exactly the opposite of what is desirable. Instead of trying to predict the unpredictable, the wise investor follows a pre-determined plan that includes professional money management, consistent contributions that take advantage of the power of dollar cost averaging, and, when possible, makes lump sum contributions when recommended by their advisor.
“Throughout history, markets have gone through many challenges – only to gain new ground and reach new heights.”
– Scott Penman, Executive Vice-President and Chief Investment Officer, Investors Group Investment Management
It can be difficult to stand your ground after your portfolio takes a hit and that’s why many individual investors tend to ‘lose their cool’ and instinctively wish to move their equity holdings into short-term guaranteed investments such as GICs.
This type of strategy - to exit the market at a low point and sit on the sidelines to wait for the markets to improve before moving back into equities – can result in missing out during the market recovery stage. . Why? Because historically, following a three month period of decline greater than 20%, the TSX has on average returned 14.1% in the following year. Five years later, the average total return was 37.6%*. So how important is staying invested and benefiting from those first years of returns? Without it, you would have historically missed out on 40% of the total five-year gain if you were even temporarily invested in Guaranteed Investments.
Remember, your savings need to support you throughout your retirement and chances are your retirement will last longer than any market downturn. Such a time-horizon provides your investments ample opportunity to bounce back to higher returns.
There is no sense dwelling over circumstances beyond your control. Keep true to sound principals and stand your ground. Continue to be pro-active by meeting with your Investors Group Consultant to review your family budget, re-prioritize your discretionary spending and ensure your investment portfolio is appropriately diversified and in balance. If history repeats itself, and it generally does, the investor who stands his or her ground will be better served in the long-run.
*Computerized Portfolio Management Services Inc. (CPMS)
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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