Midyear market and investment reviews

BY FAZAAD BACCHUS

Midyear market and investment reviews

Soon you will be receiving your midyear investment statements. Following what transpired last year, this should be a welcome change. Markets have been very good last six months in general. Indices like the TSX are up 14% year to date while the S&P 500 is up 17.30% together with the Dow at 14% and the NASDAQ at 20%. These figures are a welcome change indeed as the TSX itself was down 11.6% last year and the S&P 500 was also down 6.2%. Generally the market is cyclical and a good period is often followed by a weak as well as a weak period followed by a strong. However this is not a rule neither a strategy to follow when investing.

When you receive your statements you will notice that almost every investment is up and while this feels good it can lead to poor decision making. Bonds were up almost 5%, medium low investments were up about 9% with medium risk investments ranging between 10% and 15%. When funds are up the average investor tends to invest more hoping to make gains in the short run, quite in contrast to when funds are down, the average investor tends to pull out because they are afraid of the possible losses. Investments are not meant to operate this way for the general public. Both are poor mistakes when investing for the long run.

The average investor ought to engage in the practice of asset allocation where the investment decision should be made to cover a long duration. It should be based on investments that have performed over time, especially the recent past, has acceptable volatility and a proven track record; it should not be based on the flavor of the month. I have always subscribed to the strategy of buying good companies and holding them for the long term. Trying to time the market can lead to disastrous mistakes as well as frustration when you appear to be chasing returns. By the time you have gotten into an investment, it is already at its peak, there is no place to go but down.

Dollar cost averaging is one option a client can utilize when they are uncertain if the market is going up or coming down. For example, if a client has $12,000 to invest and he invests all at once and the market falls in the second month, then his entire $12,000 will be affected. However if he invested $1,000 per month over the next twelve months, and the market falls in the second month, then it is only the 2 months deposit which is $2,000 that will be affected. As the market comes back up there is still $10,000 to be deposited earning a positive return. Actually anyone who makes a monthly PAC to their RRSP or TFSA is actually engaged in dollar cost averaging.

Getting good returns on your investments is not a fluke job; it involves lifecycle investing. Asset allocation suitable for one is not suitable for the other. A twenty year old may be comfortable with 100% equity in their portfolio at medium high risk, but generally such a portfolio would be unsuitable for a retiree. To know what type of portfolio you should be in, talk to a qualified advisor today.