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Investing: ‘What ifs’ and ‘maybes’ lose out to long-term planning

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Back in August 2011, I posted Don’t Panic. plan

I took a look at investor psychology in the face of negative sentiment on the markets. In It was the best of times (for dividend investors), I outlined how well dividend-payers did over the last few years. The markets have done very well for the dividend-centric.

So what’s an investor to do, now?

Interesting U.S. market stats

Bob Pisani, of CNBC, points out some interesting information regrading U.S. markets:

Most notable among the trends was a near-record pace of fund flows last week into equity funds.

Stock mutuals saw $19 billion come in, the highest since 2008 and the fourth-biggest in the 12-year history of tracking the data, according to Bank of America Merrill Lynch.

The latest American Association of Individual Investors survey registered a 46.4 percent bullish reading during the same period, well above historical averages, while those expecting the market to be lower in six months fell to 26.9 percent.

Finally, the CBOE Volatility Index, or VIX, a popular measure of market fear, is at a subdued sub-14. A declining VIX usually means rising stock prices.

(Read More: Why VIX’s Recent Plunge May Be Bad for Stocks)

About the only areas showing caution were safe-haven money market funds, which saw assets grow to $2.72 trillion on an influx from institutions, and commodities, which had outflows of $570 million.

The most popular reason among traders for all the optimism is basic relief that the U.S. made it through the “fiscal cliff” scare relatively unscathed.

If that’s the case, the looming debt-ceiling battle and a likely lackluster earnings period could offer perilous counterweights.

So, what’s an investor to do?

The reality is, if you know who you are as an investor, and more importantly, where you want to be, none of this should rattle you. But it should make you think. Trading the media is something some do, and some do it very successfully, but most don’t. And that’s why investors must plan.

When planning for a year, plant corn. When planning for a decade, plant trees. When planning for life, train and educate people.

— Chinese proverb

Warren Buffett plans. Why not you? After all, planning is a form of self-reflection and self-education.

The metric of the past and planning for the future

It may be wise for investors to reassess their investing plans, to decide if their plan is capable of meeting their goals and then have the courage to sail on the course they’ve charted. If past is prologue, then the last couple of years have rewarded the longer-term planners for wading through the ‘what ifs’ and ‘maybes’ and sticking to the fundamentals.

The market hasn’t had a 10 per cent correction in a while in the U.S. While we all watch, we have to wonder at the market’s resilience while remembering why we hold assets that act as ‘insurance’ against revaluations. Any correction should be incorporated into your plan and taken advantage of. But a 2 or 3 per cent drop from an all-time high is hardly a correction. Having some cash on hand when markets have hit recent highs is rarely a bad idea.

The market hasn’t seen a traditional correction in almost three years. Majority sentiment would have seemed against this phenomenon three years ago. We will have a correction at some point. No one can be sure of the degree of the next correction. But does this alter your planning?

Planning empowers you in the face of ‘peril’

It’s best if you incorporate the possibility of a correction into your plan. Because, at some point, the stock markets will correct.

In a world gone into overdrive, where the short-term seems like the long-term to some, authentic long-term planning may be the most valuable commodity.

The markets are like anything else with respect to planning. And the markets are one of the best barometers of human psychology. ‘Perilous counterweights’ need to be part of your planning.

We’ve all heard that in the long-term risk gets reduced by time-in-the-market. In the meantime, knowing your tolerance for risk is crucial. What we can learn from the period from August 2011 to now is that risk happens in so-called ‘safe’ investments, too.

The broad markets have outperformed cash. At some point, markets will correct. Maybe that process has started. Markets correct. This is part of what makes a bull market healthy. And corrections are the reason why we should use proper asset allocation in our portfolios.

One thing is sure. It was better to be in-the-market than it was to be in cash in the time period we looked at above.

No one owns the patent on the future. No one ever knows the exact nature of the next correction. It’ll be interesting to see what the next six months holds …

A plan we can live with is part of what keeps people happy as investors over the long-term. So that we can sleep and dream of sheep.

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One sector is the loneliest number when it comes to investing

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Will all the gold that glitters glitter less?

Will all the gold that glitters glitter less?

My last post, One stock is the loneliest number when it comes to investing, made the case for why you shouldn’t own one stock as an investor. Diversification is an important part of your investment planning.

Similarly, today’s activity in the gold market, and really, the last few years, has demonstrated why single sectors present significant dangers to investors who overweight them.

Gold is having a massive down day. It’s dropped nearly 10 per cent as of this writing — in one day — the most since the early 1980s.

The writing was on the wall a long time ago. In Gold riot, I discussed why gold had much risk built into it for investors, especially when few were talking about this risk.

Here’s a quote from Warren Buffett as posted on my blog from a few years ago:

Buffet on gold:

“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Ah, the Ziggy Stardust gold analysis …

In Fortune, Buffett recently said:

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States,” Buffett said. “Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

A very, very interesting illustration …

Anyone who paid attention to the wisdom above, to the valuations that Buffett drew attention to, would have known that there was huge risk in gold.

Forget all the reasons you’ve heard over the last few years for why gold was a great buy. History has proven that reasoning wrong.

GLD

The movement of gold as reflected by the SPDR GOLD TRUST (GLD)

As in many things, now that the stratospheric valuation in gold has been beaten down badly, gold is cheaper (down almost 18 per cent year-over-year). What the future holds is unknown. But what hasn’t changed is the following:

  • Single sectors expose you to great risk if you haven’t built a well-diversified portfolio
  • “Hot money” moves fast and takes few prisoners when it leaves a sector

Gold may be much cheaper now than it was a few years ago, but gold is only a compelling buy if the future shows it to have been cheap. Meanwhile, are there other companies out there that are actively engaged in producing goods or services that will have a better chance of creating value in the future?

By way of comparison, from gold’s peak a few years ago, the returns on dividend-payers in the U.S., Canada and globally look spectacular. The “fear trade” (buying gold) has been a poor investment.

Markets will correct. It’s inevitable. You can do your part protecting yourself by making sure you have a diversified portfolio.

Do you?

Click here for more about bonds/fixed income investments.

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

Click here for articles about dividends/dividend-payers.

Click here for a collection of articles about investing.

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//

Written by johnrondina

April 15, 2013 at 2:35 pm

Stocks, bonds and what? People need to learn more about investing

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Financial literacy or a pair of shoes?

Last year I blogged about financial literacy in Canada.

Statistics about kids and adults are a little worrying when it comes to financial literacy. From new data, Americans aren’t much different. Studies show people need to do a lot more to become financially knowledgeable.

Juggling the egg

I recently overheard this: “What’s in your portfolio?”

Blank stare, and then: “I own XYZ.” (One of the biggest stocks in the U.S.)

That’s it. XYZ. Nothing else.

But wait! XYZ’s done great! It should go up forever or even longer.

Hmmmm … The thing is:

Those are the two “it’s different this time” ideas that have humbled investors since stock markets were born. Short-term thinking … People forget that the XYZ’s of this world have been a long interchange of different companies throughout investing history.

Do you really want one egg dictating your financial future?

Investing without diversification is potential financial suicide. (Or at least financial Russian roulette.)

Momentum is a marvelous thing when it’s on your side. But your worst enemy when the tide changes.

Ask former RIM, Palm, Nortel, Enron, Lehman Brothers investors.

If this had been your only stock, how would you have felt? What would have happened to your portfolio?

Know what you know:

Find out what you don’t know

According to the Investor Education Foundation of the Financial Industry Regulatory Authority’s study in the U.S.:

  • 67 per cent rated their financial knowledge as “high”

but,

  • Only 53 per cent answered this question correctly:

True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.

I doubt that most of these respondents were momentum traders trading single stocks. It’s more likely that the majority had no idea that this is one of the most important rules of wealth creation: Diversification.

  • Only 6% got the above question wrong, choosing “True.”

But,

  • 40% said they didn’t know the answer, and 1% declined to answer

Ouch.

Maybe it was just an anomaly.

Let’s try again:

If interest rates rise, what will typically happen to bond prices?

Rise? Fall? Stay the same?

No relationship?

  • Just 28 per cent answered correctly

Yes, they will usually fall.

  • 37 per cent didn’t know
  • 18 per cent said bond prices would rise if interest rates rise
  • 10 per cent said there’s no relationship between bond prices and interest rates
  • 5 per cent said bond prices would stay the same
  • 2 per cent said they preferred not to answer

Becoming a statistic can have long-term complications

Looking at these stats shows there’s a lot of financial illiteracy out there.

It’s a crime that financial literacy is not taught in high schools.

— Michael Finke, professor of personal financial planning at Texas Tech University/co-developer of the Financial Literacy Assessment Test, part of Ohio State University’s Consumer Finance Monthly survey.

(In Canada, things are changing.)

Can teachers help?

When asked about six personal financial planning concepts:

  • Fewer than 20 per cent of teachers and teachers-in-training said they felt “very competent” to teach those topics
  • Teachers felt least competent about saving and investing

   — 2009 survey of 1,200 K-12 teachers/prospective teachers National Endowment for Financial Education

What do you do if teachers don’t feel competent to teach financial literacy skills?

Governments …

  • Need to focus on helping teachers get these skills

or

  • Need to bring in outside help to assist in improving financial literacy skills

Agencies are doing their part in both the U.S. and Canada to raise awareness around financial literacy. They can’t do it alone:

  • Parents need to teach their kids about debt

But parents need to understand the dangers they’re trying to warn their kids about.

The consequences to our economy and economic future of financial illiteracy are immense. Championing long-lasting positive changes for kids (and adults) is important.

Those shoes were made for walking (but they could really cost you)

Study after study has shown that adults will spend more time focusing on buying a pair of shoes (or other purchase) than they will on their financial future.

Is this the legacy we want to leave our kids?

Find out more about diversification:

You don’t need to listen to Warren Buffett (if you’ve allocated your investment portfolio properly)

A simple way to arrive at the right asset allocation for your portfolio

Get the balance right

Plan like a pension fund manager when it comes to your investment portfolio

Asset allocation: Diversification is king

How to be a smarter investor

Is it better to have invested, and lost, than never to have invested at all?

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Well …

It certainly helps you achieve your investment goals if you own investments that have a chance of getting you to your destination.

Take a look at the following charts and ask yourself two questions:

  • If you had bought during the major dips, would it have benefited you?

and

  • How would you have done with your money in low interest instruments according to the charts below? *

Example fund vs. 1-year GIC

Example fund vs. 5-year GIC

It’s clear that the most conservative investments wouldn’t have served you as well since the inception of this fund. What investors would do well to remember is that GICs lock your money in until maturity while mutual funds, ETFs and stocks are more liquid, generally.

Not to mention:

  • If you had bought during the dips

and

  • If you had rebalanced regularly

… you’d have done better than the chart shows since you would have lowered your cost or ACB and generally bought lower and sold higher.

So …

Do you have a plan, a strategy?

What is it?

Remember a few weeks ago when the news about Europe was so bad that optimism seemed naive?

I’m paraphrasing myself from a previous post. I talked about learning to harness your fear. There are always reasons you can find for Armageddon if you look hard enough.

People want stability. At times, markets and the business cycle are anything but stable. Above, you can see that during the worst stock market correction in most of our lives, an example of a balanced, dividend-based portfolio outperforming the most conservative of investments, GICs, by  four times or more.

When the doom and the gloom gets really thick, many investors feel paralyzed. But that’s exactly when great investors look for opportunity.

During the doom and gloom, markets often decide to have a good bounce.

Isn’t that counter-intuitive?

Actually, it’s pretty normal. If there were no walls of worry to climb, there’d be no bull markets. In “Wait a minute. There’s some good news re the markets?” I blogged about how investors often miss the opportunity in the end-of-the-world-as-we-know-it scenarios.

I posted some stark stats in “Why you should consider new investments now”.

Since we’re supposed to be strategic about long-term investing, let’s ask ourselves a question again:

When the market takes a substantial dip, is there more chance that it’ll rise or keep falling on average?

In “Don’t Panic”, I also talked about managing fear while investing. Learning to harness your fear is important in sports. Imagine you’re taking a penalty. It isn’t easy to stand there and score in front of 70,000 people.

Why should it be any different when you invest?

What’s the market going to do?

No one knows. There are a lot of educated guesses, research, charting, but no one knows.

Accept it.

Just as, if you decide to start a business or enter into any kind of relationship, there’s no 100 per cent satisfaction guarantee.

Business, economic news, the process of investing, continues to flow. It’s a river. There are rapids. There are waterfalls.

There may even be a couple of Niagaras out there.

But if you look at history, you’ll see that there were always those who pushed and went further. For every time you encounter end-of-the-world-scenarios, you’re going to see that someone steps up, looks at the recent correction in the market and says:

Hey, there may be some value here.

Accept the psychology of the market. But get a plan.

Is the bad news over?

Here’s what I said in that previous post:

We’ve come through a tough time. We’re not out of the woods yet, but if you’ve been sticking to a sound investing plan, you’ve taken advantage of the weakness in the market.

The bad news about being an inactive investor in 2011

If you had been sitting in cash only:

  • You missed a very nice rise in the bond markets

and

  • A great opportunity to reallocate investments to stocks

You might have taken advantage of a great time to buy equities at lower prices and participated in the rise of the bond markets.

Or, you might have asked the more unlucky question:

What happens if the world ends?

It might be better to ask:

What happens if I think strategically about my investments?

What happens if the world doesn’t end?

Want more information?

Click here for more about bonds and fixed income investments.

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

Click here for articles about dividends/dividend-payers.

* Example fund chosen out of large bank balanced funds with a dividend bias. Fund used purely for illustrative purposes with a time period of less than ten years since the effect of the financial crisis should have been greater during this period.

Chart source: Globeinvestor.com

Part Two: You don’t need to listen to Warren Buffett* (if you’ve allocated your investment portfolio properly)

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In Part One of this post, I left off saying I’d discuss why having a plan benefits you when it comes to asset allocation within your portfolio.

Markets keep on moving

Investors have to be conscious of the fact that the markets are never static. No one knows exactly what’s going to happen in the markets.

Since markets change, and taking into consideration recent events, here are three points we should consider:

  • Are investors now overweight bonds?
  • Do investors miss out by trying to time the markets?
  • Can you achieve your investment/retirement goals by holding (supposedly) low-risk investments?

The bond blackhole 

It’s highly probable that some investors are overweight bonds. If this movement to bonds is related to short-term fear rather than long-term planning, it’s a mistake.

Consider an older retiree who’s heavy in bonds. That same retiree holding a large fixed income component in his portfolio is going to suffer in a bond correction.

Still, these older retirees need the safety fixed income investments provide them. But retired investors need to weigh the potential in equities long-term over the safety in bonds or GICs and allocate accordingly.

Equities, inflation and long-term hedges

Here’s an interesting article from The Economist discussing Canada’s pension plans.

Ask yourself: Why do professional pension fund managers include equities in their investments? Are they about to abandon stocks?

Without growth an investor’s going to be in trouble when they begin withdrawing investments in retirement. Equities have done best over the very long-term against inflation, even during recent superb bond outperformance.

So, what’s happened to stocks? Why all the noise?

Of course, it’s generated by abuses leading up to the financial crisis, and investors who’ve been spooked by the big correction of 2008-2009. But here’s the thing:

Stocks have undergone a period that will go down in history as one of the largest corrections most investors have seen. Equities then had a larger than average correction last year.

Since that time, if you’d focused on the opportunity presented, you’d have had some nice returns. Stocks may correct again since they’ve had a march upwards. Companies have increased dividends focusing on what looks like better times with strong balance sheets.

Are stocks a better value than bonds?

In Part One, you can find solid reasoning on why they are.

Don’t want to be glued to your portfolio?

What’s the easiest way to take advantage of market swings that favour different investments at different times — without becoming a burden on your personal time resources?

Proper asset allocation.

Despite the volatility, stocks have done pretty well

As the chart above shows, stocks and bonds have still done pretty well over the long-term. Amidst all the volatility, stocks and bonds have performed. U.S. stocks may not have done as well for Canadian investors, but they picked up enormously in 2011.

Avoiding equities? It’s going to cost you in the long-term

The S&P/TSX 60 is made up of sixty of the largest companies in Canada. These dividend-paying stocks have done well over the ten years above despite the correction during the financial crisis.

Since equities have had a couple of major corrections in the last five years, they continue to show value especially in the face of historically low interest rates. U.S. equities are showing even more value relative to those in Canada. But they’ve also had a nice increase lately.

Believe in your plan

The stock and bond markets have shown an amazing ability to outwit retail investors. It’s hard to know what the markets will do. Don’t worry about it.

The secret is focusing your energy in a pro-active plan:

That long-term plan will help keep you focused.

Do you still believe in your plan? Are you comfortable with the amount of risk your taking?

If you believe in your plan and you are comfortable with the amount of risk you’re exposed to, make sure you apply the following to your investment portfolio:

  • A well-balanced mix of suitable assets
  • Evaluate your portfolio regularly
  • Stick to your plan
  • Rebalance your portfolio
  • Diversify with respect to the assets you hold, as well as the geographies you hold them in
  • Contribute regularly to your plan in order to take advantage of market volatility

Stocks have a lot going for them at the moment, but they’ve had a great run over the last few months. Will they correct?

Bonds have performed very well since the financial crisis. Will they correct?

Whether there’s a market correction or not in either asset category isn’t important. What is important is that you have a long-term plan that takes advantage of outperformance at different times in both stocks and bonds.

A good manager will make use of market volatility.

So can you.

Need more information?

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

How’s Warren Buffett’s long-term stock-picking record?

Chart source: Globe Investor

 

*While using proper asset allocation may reduce your need to listen to Warren Buffett about the stock markets, listen to him, anyway. Few have been as successful as Buffett in stocks.

The title of my blog post is a poke at his critics. Even fewer of them have had the same long-term track record as Buffett!

A question every investor should ask: What happens if the world doesn’t end?

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Learn to harness your fear

Remember a few months ago when the economic news was so bad that optimism seemed naive?

Well …

Markets the world over made solid gains in January.

Have a look at this recent article. Negative investor sentiment is occurring at the same time as the best January in the markets since 1987.

The markets often climb significant walls of worry. Sometimes, it pays to focus on bad investor sentiment and use it as a contrarian indicator.

In “Wait a minute. There’s some good news re the markets?” I blogged about how investors often miss the good news flying below the radar.

Many people have been burned by the excesses of credit mania, culminating in the market implosion of the financial crisis.

Humans in all walks of life sometimes give in to greed. Exuberance and fear are flip sides of a coin forged at the beginning of time.

I posted some stark stats in “Why you should consider new investments now”.

Why post negative stats? Because, while end-of-the-world scenarios might sell bytes of information in the short-term, they don’t do much for the average investor who’s trying to be strategic about long-term investing.

The starkness of information can be helpful.

Ask yourself a simple question:

When the market takes a substantial dip, generally, is there more chance that it’ll rise or keep falling on average?

Bad news gets the big, black ink (or bytes)

There are always going to be onslaughts of bad news. Good news rarely gets the big, black ink of the headlines until the story’s over. In between, you need to manage your fear.

You need to think strategically.

In “Don’t Panic”, I went into greater detail about managing fear while investing. Learning to harness your fear as an investor will go a long way toward helping you create an intelligent plan of action when it comes to investing and financial planning.

Again, in “The grand parade of future dividends “, I discussed how corporations were increasing dividends (good news for investors) and ended with the question:

“What happens if the world doesn’t end?”

While Canada is experiencing higher unemployment, the U.S., recently written-off as a basket case, just posted strong employment numbers.

What people keep forgetting, is that business, economic news, and the process of investing is fluid. Some get so used to bad news that they forget good news exists.

Until January, there wasn’t a big focus on the positive. But whispers of good news were there if you read between the lines (or read more than just the headlines).

Now, was it really a good idea to sit on the sidelines as an investor during all that bad news? And is the bad news over?

Well, here’s the thing:

We’ve come through a tough time. We’re not out of the woods yet, but if you’ve been sticking to a sound investing plan, you’ve taken advantage of the weakness in the market.

The bad news about being an inactive investor in 2011

If you’ve been sitting in cash only:

  • You’ve missed a very nice rise in the bond markets

and

  • A great opportunity to reallocate investments to stocks

Risk applies to low-paying GICs just as much as it does to equities or real estate.

In this case, low-paying GICs weren’t much of a safe haven when compared to the Altamira Income Fund, or even the broad Globe Fixed Income Peer Index.

Sitting in GICs can cost you.

So, when you consider the past year would’ve been:

  • A great time to buy equities at lower prices

and

  • That bond funds significantly outperformed the GIC index *

… it pays to ask this question again:

What happens if the world doesn’t end?

The case for bonds against ...

... GICs. (Over five years)

Click here for more about bonds and fixed income investments.

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

* Many criticize bond funds for their higher fees as compared to ETFs, but for many average investors they are the easiest way to get a diversified bond portfolio since not every investor has a trading account.
* You should also note that since bonds have significantly outperformed, they may not perform as well over the next few years. A balanced portfolio is the best way to ensure consistent outperformance while minimizing risk.
Note: Fund/funds used here are only for illustrative purposes.
Chart source: Globe Investor

Part Three — Market volatility: Why and how to make it work for you

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In Part Two, I left off discussing benchmarks on investment returns.

Easy as ACB revisited

I stressed that such benchmarks only reveal how your investment would have done if you invested all of your funds at the beginning of the period. These benchmarks assume you were inactive during the time period you’re measuring, and you did zero rebalancing during 2008-2009 or other significant market corrections — exactly the periods of time when you should be (or should have been) more active.

While investors should have been rebalancing during 2009, research shows average investors freeze up during these times, or worse, sell.

The worst case scenario is that they sell heavily.

Let’s say you had a large cash position in your portfolio near the bottom in 2008-2009. New cash, profits you’d taken, whatever …

Now, let’s say you used that cash and bought equities around that time, which turned out to be the bottom or near the bottom of the correction. Your return would be considerably different. And this is why rebalancing is so important to the success of your investments, portfolio and retirement plan.

If you’d been following a sound rebalancing strategy, you would have bought during the downturn in 2008-2009 because your asset allocation would have drifted away from your plan.

Let’s use a simple illustration:

• You bought 50 shares (or units of a mutual fund ) at an average cost of $7

• Then you bought 10 shares at $5 (you were brave and when the market dropped 50 per cent in panic selling, you saw opportunity)

• You then continued to deploy your cash while the market was cheap and bought 10 shares at $6 (because of your rebalancing strategy, which you follow automatically. You bought while prices were cheap because your asset allocation had changed.)

• The market rose dramatically after this period and your asset allocation reached your target. You stopped buying.

So, your adjusted cost is:

50 @ 7= 350
10 @ 5 = 50
10 @ 6 = 60

Your total cost was $460. The price now is $7.
7 x 70 = $490

You now have profit of $30, called a capital gain.

In reality, your transactions will be more complicated, and there will be dividend payments in there somewhere. But the simplicity of this example shows us how following asset allocation strategies with your investments will help you lower your Average Cost Base (ACB).

Your equity component would have been, percentage-wise, less than it had been. Your allocation plan would have kicked in, and you would have bought the underperforming equity investments.

Even if you did this more gradually, before, during, and after the correction, it would have lowered your average cost.

One way for Joe and Josephine Average to get a leg up is to take advantage of what’s available to them. Tax-preferred or (deferred) investments and plans, and sound portfolio strategies included.

But research shows they don’t. Volatility spooks them, and sadly, this will cost the average investor over the long-term.

When I was a kid …

An older colleague I used to work with said the following, loosely paraphrased, about his lack of savings and investments in his youth: “When I was a kid, I was convinced I wouldn’t make it to forty.”

Heavy pause.

“I was wrong …”

I had asked him why he didn’t have an RRSP because I wanted to understand how he thought. He later added that he had lost a ton of money in real estate (Canadians seem to have forgotten the real estate crash that happened in 1989-1990 – Americans have had a harsh reminder).

Looking at real estate in this context reinforces my point of view on buying assets when they’re low. While it took residential real estate a long time to recover from ’89-’90, today’s real estate prices (supported by an extended period of low interest rates) prove that buying assets when they’re cheap is rewarding.

Yet nobody wanted residential real estate in ’89-’90, and many developers lost their livelihoods during that time.

Raising awareness, being startegic

Raising awareness about the investing habits of Joe and Josephine Average will help them over the long-term. They need to better educate themselves about market volatility and be more strategic in their approach to it.

While this is easier said than done, it is one of the reasons the Warren Buffetts do better than the Joe and Josephines when it comes to investing and financial planning.

Market volatility, understood properly, is your friend. Reminding yourself of this completely reframes the way you look at the market, your investments and corrections.

Maybe your friend goes a little berserk once in a while. Maybe he’s a little impatient or a little irrational at times, but he’s still your friend.

You know you can count on him when you’re down. Looking at market events this way, despite difficult times, puts you in control.

Just make sure the relationship is a long, diversified one.

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