Friday, October 31, 2008

Investment Review - John Scholl

Tough financial times call for tough portfolio love
It’s tough out there. Markets are volatile. And inflation is once again rearing its ugly head. In these tough financial times, what’s an investor to do? The quick reaction is to be defensive, get out of the market. But the quick reaction is demonstrably the wrong reaction because it will end up costing ‘defensive’ investors much more money in the long run. Here’s why.

The strong historical case for staying invested
It pays to stay invested because, historically, markets have rebounded. Take a look at some of the worst periods experienced by the Toronto Stock Exchange (TSX):

  • In the recessionary year of 1974, the TSX’s annualized compound annual return was minus 25 per cent; the next year, 1975, the TSX had rebounded to deliver a plus 18.5 per cent annualized compound return – and in the five following years, to 1980, the annualized compound return was plus 22.3 per cent.
  • In the recessionary years from 1981 to 1990, the TSX hit a low annualized compound return of minus 14.8 per cent; in 1991, the exchange rebounded to a plus 12 per cent annualized compound return and delivered an annualized compound return of plus 10.8 per cent in the succeeding five years.
  • The tech bubble/bust of the early 2000’s caused even worse volatility. At its bottom in December 2002, the TSX’s cumulative return was minus 43 per cent. It took 34 months to totally recover from that low but by the third quarter 2005 the TSX began to experience significant growth that continued until recently.[*]

The strong case for not attempting to time the market
From January 1, 1990 to December 31, 2007, the Standard & Poor’s (S&P) Index grew by 8.2 per cent (annualized price-only performance) – in the face of market booms and busts, war, 9/11 and much more. If you had attempted to time the market during that period and missed out on just 10 of the strongest trading days, your total return would have dropped to 5.4 per cent.[**]
The answer in tough times – the same as in good times

Time in the market helps create wealth.
Have a plan that matches your tolerance for risk and stick to it. Diversify by asset class – cash, equities and fixed-income investments. Diversify within asset classes. And stay invested for the long-term.

No one, expert or amateur, knows exactly when or how the market will rebound. And right now is way past the optimal point for liquidating your market holdings. By clarifying your goals, you and your financial advisor can put together a diversified portfolio that offers a comfortable blend of risk and return, regardless of market volatility.

Guest Contribution from John Scholl. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant John Scholl @ 905 450-2891 X529
John Scholl B. Mathematics, CGA,
Wealth Management & Financial Planning
Investors Group
200 - 24 Queen Street East,
Brampton, Ontario L6V 1A3
( Tel. : (905) 450-2891 X529

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