Rational Advisor

Investors with long investment horizons have a big advantage at the moment. It’s a simple point - bit one often that is ignored, when markets are volatile.

Of course there are signs of worry all around. Bond investments have not provided any returns to speak off, Blue-Chip companies have had a tough time getting short term loans. Inflation seems to be rising, oil prices are going up, the US dollar is almost disappearing. A mounting worry is the continued deterioration in US housing leading to a consumer slowdown that would affect global growth.

Ever since man invented markets - it started with goats and cows and morphed into credit default swaps and hybrid collateral debt obligations - one thing has been constant. prices go up, and they go down. Sometimes they go down hard. This short term volatility is the price you pay for the long-term gains the stock market delivers. it’s entirely normal. And we have to admit that we are powerless over the stock market.

Before investors sell their mutual funds, its worth remembering that diversified stock and bond portfoliso have still returned greater returns than GICs over a five year period. And as assets get cheaper, the odds of success looking out several years are actually going up.

The short term investor is going to invest based on the guess of shrt term news flow, and I can invest based on long term business fundamentals, I like my chances.

Recently Financial stocks have been taking it on the chin as investors worry about the fallout fromt eh credit squeeze. But any losses the banks incure woudl be mere paper cuts compares with the billions in profit they pull down annualyy. I continue to remind investors that Canadian and US banks have extremely strong capital ratios. So stick with quality.

When markets are going to hell, there’s nothing like a dividend cheque to cheer you up - especially when the cheque gets bigger every year. Banks, insurers, pipelines and some REITs are examples of companies that excel in this respect. So, have investments that have an emphasis on rising dividends, instead of a “sexy” story. And if these dividend companies fall in value, you are really getting the future increasing revenue stream at a cheaper price.

History can also offer some perspective. Investors who held on to their shares during the steep market dives of October 1987 recouped their losses in about 15 months - not including any dividends received in the meantime.

Volatility in and of itself, should be meaningless to the long term investor. Most people I know are far too transfixed by the value of their investments at any given moment, when they should be focused on some point in the future - when they will actually need their assets for a downpayment on a home, for college tuiton or for retirement.

As I’ve said many times. If you need your savings right now, you shoudl be in cash or a cash equivalent, not stocks. Then you have no volatility. For everyone else. the only thing that matters is what your assets are worth when you need them.

While the current market appears to be stabilizing, there are concerns that further drops will continue for months, as more real and perceived risks in the US credit and financial markets crop up. But for investors who don’t need to sell today, this is a good time to profit from the losses of those who do.

So let’s keep things in perspective as the market reacts to data like credit crunchs, banks earnings, etc. There may be more bad news and more volatility before we gain some clarity about the future strength of the economy. That doesn’t mean patient investors need lose any sleep.

Stay positive. Yes. it’s scary out there.Ooooo scary! But, it’s not all doom and gloom, folks. Remember that this, too shall pass. During the stock market crash of 1987, the Dow Jones Industrial average fell 22% in one day. less than two years later, it had recouped all of its losses. Five years later it was up 41% from its level BEFORE the crash, and ten years later it was up 253%. Just like last year people were focussing on Income Trusts, now it’s the banks, and people forgot about INcome Trusts. Similarly one year from today, people will forget about sub-prime etc, and these good companies will continue on getting their profits and dividends. In the menatime, you have the choice of taking advantage of others panics and getting the investments at cheaper prices. Also, when having a longer term viewpoint, not only returns, but also volatility and Correlation of returns are predictable.

Focus onthe long term, I know that’s easy to say, but it is the truth. Check out the chart of RBC Dividend Fund, TD Canadian Bond FUnd, Acuity Fixed Income Fund, Mawer World Fund, Brandes International Equity, CI Synergy Canadian Momentum, Cundill Security A, Leon Frazer Canadian Equity, Saxon Small Cap, Marsico Capital Management, Dreman Value Management or any of the other managers in our portfolios as an example. Do you think folks who bought 10 years ago are worried about the latest hiccup? No, they’re too busy picking out a fall wardrobe at Holt’s.

The way your portfolio is constructed is key. A good portfolio that takes risk management into account favours an adhoc process of picking whats hot each year. Dalbar is on of the institutions that has consistently demonstrated that the average institutional investor, who invests with a process outperforms an averatge investor who invests using their emotions. (source: Dalbar Inc. Quantitative Analysis of investor Behaviour, 2003).

Resist the urge to check prices every 30 seconds. if you invest in solid businesses, just hold them and forget about them - let them do they’re thing. Checking prices will only give you an ulcer.

Give yourself a break, go for a walk. Do anything to take your mind of the markets. Everything’s gonna be okay. The world has not ended, and good sound investments run by investment managers who have tonnes of experience in investing in volatile times will again shine, as they look for companies that continue to increase their profits, and thereby increase their dividends, and find new ways to increase revenue, at cheaper prices than a year ago.

Rational.

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