|Staying on track
Monday, June 13, 2011
It has been said that investing is a marathon and not a sprint.
It is sometimes very difficult to stay with the plan and stay
on course over the long haul when there are many influencing
factors that might push you off track. Here are some of the
more common and dangerous ones I’ve come across over the years.
Moving to cash during a market downturn. I listed this first
because it’s potentially the most destructive to your long term
goals. Investors who moved to cash late in the 2008-09 credit
crash were severely punished if they didn’t move back into equities
for the 2009 rebound. If you find a correction is causing you
undue stress, have patience and wait for the market to bounce
back before rebalancing your portfolio to reduce volatility
or give you better balance with your choices of investments.
This might take three to six months, or it might take two years.
But remember, markets have always gone on to new highs after
every correction in the history of the stock markets.
Changing financial advisors. It happens for a variety of reasons.
Often, however, investors move investments to a financial advisor
recommended by a friend or relative, because of seemingly impressive
returns. Be very careful with this one. Your friend or colleague
who achieved the high returns might be very aggressive and may
be able to handle more volatility than you. This person has
different goals and probably a different time horizon than you.
The best returns may have already passed in the sector(s) where
the best money was made and you will now be buying in high.
I had a client leave me some years ago because she made only
about 8% one year and a friend made 20%. The years after she
moved, her $120,000 became less than $80,000. It still hasn’t
recovered, and the money is locked in (unless exit fees are
paid, adding insult to injury).
Moving to sectors after big returns. Much is written about
chasing high returns, and many investors have lost money on
this “strategy.” There are times when a bull market lasts 10
to 15 years, and you can get in after big returns have already
been posted. This might be the case with energy and precious
metals now, but don’t get in late with large lump sums. If you
are late to the party, start a monthly pre-authorized plan,
and if the sector does correct, you will continue buying low
and reducing your unit costs every month until it goes up again.
The decade from Jan. 1, 2000, to Dec. 31, 2009, has been called
“The Lost Decade” as US$1,000 invested at the beginning fell
to US$909 by the end of the decade. This is a very rare event
and makes many investors move in a more conservative direction,
which could be a mistake. Your plan and your goals don’t change
with up or down markets. You can adjust the plan and investment
mix when fundamentals change. An example might be to add to,
say, emerging markets holdings and decrease U.S. content if
there are likely to be systematic and long-term problems with
If it sounds too good to be true, it probably is. I have a
client who prior to meeting me had invested in some mortgage
schemes that paid her financial advisor handsomely but became
worthless to her. They were held in her RRSP portfolio, so she
couldn’t even claim capital losses. If any investment is promising
returns of 10% or higher, I’d look very hard before investing
one penny of my hard earned money. Real guarantees usually offer
less than 3% in this interest rate environment.
In conclusion, if you have a financial advisor whom you like
and trust, be very careful about deviating from the plan.
Don’t check out your portfolio every other week. Statements
are issued every three to six months depending on the plan and
company you are invested with. That frequency is more than enough
if your time horizon is years away.
Revisit your portfolio very year and make adjustments as required
due to fundamental changes in the markets or changes in your
life, such as job loss, career change, salary increase/decrease,
change in marital status, death of partner, health issues, inheritance
and so on.
Don’t worry about “the Joneses,” don’t worry what markets are
doing, don’t worry about what your friends are doing, and don’t
worry about interest rates and unemployment rates. Just stick
with the plan and keep investing in your RRSPs, TFSA, and/or
open investments, and your opportunity to meet or exceed your
retirement goals will increase dramatically.
Generic Mutual Fund Disclaimer
Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read the
simplified prospectus before investing. Mutual funds are not
guaranteed and are not covered by the Canada Deposit Insurance
Corporation or by any other government deposit insurer. There can be
no assurances that the fund will be able to maintain its net asset
value per security at a constant amount or that the full amount of
your investment in the fund will be returned to you. Fund values
change frequently and past performance may not be repeated.
Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and is the
opinion of the writer. This information is not intended to provide
specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.