Equity and credit markets both go through bull and bear market cycles. Economic slowdowns stir various emotions in people. So, it’s normal to be concerned about your investments when markets decline significantly – as we’ve all witnessed in recent weeks.
If this concern turns to “losing sleep at night,” then your investments are likely not structured according to your risk tolerance. The markets have historically rebounded after every bear market cycle. Every decline in the past has been followed by an even greater recovery. Some recoveries are quick, while others require more patience.
If you are feeling particularly uneasy about your investments, we have ten tips to assist you in reducing some of the anxiety now and in the future.
- Cash Equivalents: Ensure you have cash equivalents (cash, t-bills, money market, higher interest savings accounts, and cashable GICs). This will reduce the ups and downs in your portfolio. Having cash on hand ensures that you have available resources to fund your day-to-day needs. This avoids having to sell an investment at the wrong time, and enables you to be more patient.
- Fixed Income: Bonds, GICs, and term deposits are an important component of a portfolio for people requiring income and capital preservation. Individuals who are retired or in the retirement risk zone (five or less years to retirement) should have a significant portion of their savings in fixed income. Even younger individuals who want low risk investments should consider the safety that fixed income offers. It is important to decide this component of your portfolio before you begin investing.
- Equities: If you are inclined to be worried about fluctuations in the market, you should have a much lower percentage in equity investments (i.e. stocks, equity mutual funds). People with a really low risk tolerance, or who require positive returns each year, should avoid equities. If you are willing to incur a small amount of risk then you should carefully select quality dividend paying companies. After economic slow downs, quality equities are the first to rebound. Some of the poorer quality equities may never recover.
- Avoid Excessive Risk: No individual investment is so spectacular that you need to put more than 5 per cent of your total investments in it. The same applies to not having all of your investments in one sector. It is prudent to diversify your investments.
- Avoid Leverage: Borrowing to invest, or using a leverage strategy, should generally be avoided by most investors. Leverage used at the wrong time in the economic cycle can be a serious financial setback. Most investors should also avoid investments that are illiquid.
- Avoid Structure Products: Last year we wrote several articles relating to structured products. We encouraged people to avoid products that they do not understand. Much of the negative news occurring in the credit crisis relates to structured type products. There are too many quality investments available to chase something you do not fully understand. If you do not understand the product when you buy it, it will be near impossible to monitor the position afterwards.
- Financial Planning: One of the benefits of a financial plan is to provide a long-term strategy. The plan should have some assumptions with respect to an “average” rate of return on your investments over the life of the plan. Your investment will likely have fluctuating returns over time (some years below and other years above). Many plans have suggested monthly savings for people. So many people stop saving and investing when markets decline which may have an even larger impact on your plan. Keep saving and when the markets recover your long-term plan will remain on track.
- Don’t Panic: All too often investors sell at the worst time. Studies have also proven investors often wait to buy after markets have appreciated significantly. There are a couple of sayings that are worth noting. One saying that sums up what normally happens – “in bear markets, stocks return to their rightful owners.” Successful investors such as Warren Buffett are quoted as saying, “we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
- Do Your Homework: The growth of computer trading and discount options highlights how easy it is to execute trades without seeking professional advice. The actual act of buying a stock is easy; it is the work to get to that conclusion that involves time. Investing is hard work. People should put as much work into investing their money, as they do in earning it. If you are doing your own investing then you should dedicate an appropriate amount of time for research. You should ensure you are obtaining appropriate information that is timely.
- Obtain Professional Advice: Professionals have access to a wide range of sophisticated services to assist them in providing financial advice. The support professional advisors receive from their teams, co-workers, and firm provide a very large network of resources. Having years of experience and living through various cycles help their clients deal with the different cycles the markets will go through. Selecting the right professional advisor is important; many differ in their services and levels of expertise. If you want to build a trusting relationship, you should spend the time to find the right person for you.