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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 U.S. economy.

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.



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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.