Whether you’re an avid sailor, boater, fisherman, or beachcomber, the ocean waters provide a great gateway to experience some of the best of British Columbia. Anyone who has spent any time on the West Coast can appreciate how powerful and complex the ocean can be – it is part of the mystique that makes it so fascinating.
Why are we talking about the ocean? Before we do any investing with a new client we feel it is important to first talk about stock market risk. One of the best ways we can visually illustrate this is to compare the stock market to the ocean. The oceans have periods where they are calm, and others that are rough. Tides fluctuate daily; they can be mild, or at times more extreme. Like the ocean, markets can be extremely unpredictable.
Some investors may get emotional when it comes to riding through market cycles. Buying when markets are over valued or selling after market corrections, can negatively impact long term investment performance. Before investing in equities, we feel it is important to understand that the stock market will have both good and bad periods in the years ahead.
We feel it is important to discuss risk with people before they invest. New investors may feel anxious about their investments at some point in the future, these feelings are normal. Some advisors may have told their clients that they do not have a crystal ball to predict market changes.
One way to describe market behaviour is to compare it to the ocean tides. For example, on an extreme low tide, it may be like all stocks are declining. Stock market risk is not company specific – a really low tide will typically take good companies down too, even if it is only temporary. When the tide is high, it seems like every investment advances – and the current is behind you.
Fear has always been part of the markets – this will never go away. Current fears may not be talked about in a few years. New concerns will arise and they will appear to be “different”. It is often said that stocks are the one thing many people do not purchase when they go on sale. What is the reason for this? Possibly some people may believe that the current problems are so different or extreme that we may not get through them.
Too many people wait until the markets stabilize fully before gaining the comfort to invest. It is this behaviour that causes some people to be their own worst enemy. If you believe that markets are efficient, then the markets should be at the level that reflects the risk at that point in time.
Riding the Storm
Current and future world events can cause economic instability and concern over near term growth. At times these could be compared to a storm out at sea. Stormy periods do take down unstable boats, just as market corrections impact some companies more than others. Difficult times in the markets help differentiate the well managed companies from those taking on too much risk. Companies with cash on their balance sheets, good cash flow, and solid earnings are typically better equipped to ride through the bumps compared to a company with a lot of debt and negative cash flow.
When you’re on a boat and the weather is rough, it is common to feel a little ill. The best advice is to look out into distance, rather than to keep your head down. Establishing a financial plan and focusing longer term helps keep any short term volatility into perspective.