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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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Impact investing: J.P. Morgan and GIIN show the positive growth of impact investments

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sailJ.P. Morgan and the GIIN release study showing the impact of impact investments on fund managers and client investors

Sailing into the future, we can no longer tilt at windmills

96 per cent of participants measure social and/or environmental impact and 75 per cent of fund managers say the impact measurement factor is important in raising capital

In 2012, impact investors moved forward gaining attention and assets.

J.P. Morgan and the Global Impact Investing Network (GIIN) conducted a study confirming the growth of impact investing. It’s difficult to understand what “portion of the market” the study has captured, but the survey sample has “almost doubled” from the previous year, and so, offers a “rich data set”.

Here are some of the highlights of the study:

  • $8 billion U.S. went to impact investments in 2012
  • $9 billion U.S. is expected for 2013 (an increase of almost 12 per cent)
  • 96 per cent of participants measured their social and/or environmental impact
  • 75 per cent of fund managers highlighted the importance of impact measurement for raising capital

Considering 96 per cent of participants measured social and/or environmental impact and 75 per cent of fund managers said the impact measurement factor is important in raising capital, the investing landscape looks to have changed. While participants who are already managing a significant amount of impact investments were chosen, participants weren’t exclusively impact investors, but they did see the benefit in impact investments.

Are these participants simply new impact investors? No.

  • 42 per cent were making impact investments over a decade ago

Where were they located?

  • 56 per cent of respondents were in the U.S. and Canada

How many were fund managers?

  • More than 50 per cent were fund managers

Did these investors have a narrow focus when it came to sectoral investments? No.

  • 86 per cent of investors focus on multiple sectors (top three respectively)
  1. Food and agriculture
  2. Healthcare
  3. Financial services (excluding microfinance)

Was social/environmental impact important? Yes.

  • 50 per cent focus on social impact
  • 45 per cent focus on social and environmental impact

Did participants use private equity/debt?

  • 83 per cent use private equity and 66 per cent use private debt

Respondents identified the top challenges to the growth of the impact investment industry today as being:

  • “lack of appropriate capital across the risk/return spectrum”

and

  • “shortage of high quality investment opportunities with track record”

Government impact

… there is a crucial role for governments in facilitating the transition to an economy that is much more efficient, much more fair and much less damaging … Countries that lag behind will inevitably face increasing competitive disadvantage and lost opportunity.*

When it comes to the role of government in impact investing, respondents cited the following as “very helpful”:

  • 35 per cent said “technical assistance for investees”
  • 32 per cent said “tax credits or subsidies”
  • 27 per cent said “government-backed guarantees”

Without doubt, government continues to be important to impact investing.

How did impact and financial performance do?

According to respondents:

Impact Performance

  • 84 per cent reported their portfolio’s impact performance was “in line with their expectations”
  • 14 per cent reported their portfolio’s impact is “outperforming expectations”
  • Only 2 per cent said they were underperforming

Financial performance

  • 68 per cent said they were performing “in-line”
  • 21 per cent reported outperforming

and,

  • 11 per cent underperformed

Product providers and the degree of interest by investor clients for impact investments

Obviously, product providers and investor clients play an active role in present and future impact investments.

  • 86 per cent felt “many” or “some” investors are starting to consider the impact investment market

Eighty-six per cent is a large number. One that further illustrates growing transparency and volume of information is affecting investors as much as other stakeholders.

Sailing into the future

The bottom line: A wind blowing at a 12 per cent growth trajectory

The investors in the survey:

  • Committed  $8 billion U.S. to impact investments in 2012

and,

  • Plan to commit $9 billion in 2013

… approximately a 12 per cent increase year-over-year.

Since 96 per cent  of respondents measure their social and/or environmental impact, and several studies are confirming CSR as a growing business function (find one here),  there is change in the scope of and business case for impact, CSR/sustainability investing.

What may have seemed like an exercise in tilting at windmills two or three decades ago is now a growing data set showing that the investing world is changing.

If the only thing we can count on is change, forecasting the future will include the impact of investments and their ability to focus the positive power of enterprise.

You can find the study here.

* Steven Peck and Robert Gibson, “Pushing the Revolution,” in Alternatives Journal, Vol. 26, No. 1 (Winter 2000).

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Ch-ch-changes, self-mastery and the stock market

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zenmarketFear, greed and change

The more things in the market change, the more they stay the same

Ah, the markets … If you want to do a great study on fear and greed, look no further.

In summer 2012, I posted Is it better to have invested, and lost investing, than never to have invested at all? (There may have been a little bit of cheek in that title.) The market had taken a bit of a beating after hitting highs in early 2012. Investors were piling into bonds, driving bonds higher and higher. Everybody was piling into Apple, and Apple would soon make an all-time high.

I still don’t know what I was waiting for
And my time was running wild
A million dead-end streets
Every time I thought I’d got it made
It seemed the taste was not so sweet
So I turned myself to face me
But I’ve never caught a glimpse
Of how the others must see the faker
I’m much too fast to take that test

— Changes, David Bowie

Ch-ch-changes: Turn and face the strain

Just when many investors had given up on the markets and run to bonds, bonds peaked and the markets went on a tear. To date:

  • European and U.S. stocks outperformed
  • Many had avoided European and U.S. stocks because of the various end-of-the-world scenarios hitting the headlines hard at the time
  • Apple began its more than 33 per cent decline, losing one-third of its value or more than $230 billion
  • RIM (now Blackberry) more than doubled in value (though it has pulled back lately)
  • Government bonds/treasuries haven’t done a lot while the stock markets have done well
  • Dividend-paying stocks had a good year
  • Gold didn’t glitter
  • More than $140 billion of announced U.S. M&A deals in February alone

Fashionably late doesn’t work in the markets

Suddenly, retail investors felt they might be missing the party. And they were. As these investors came back, a virtual upward spiral led to:

But, is this different than what’s gone before?

Financial information burning holes in space

The avalanche of information that surrounds the stock markets and much larger bond markets is daunting to say the least. Few can digest the information outside of financial professionals. Even Warren Buffett, by far the most successful investor I can think of, will tell you financial professionals don’t know exactly what the market’s going to do — and Buffet says he doesn’t care, in the short-term.

So, what’s an investor to do in the digital age when information travels so fast it seems to burn holes in space?*

Eat what’s good for you

Well, the flood of information’s always been there. The tools of dissemination have just changed. You still need to be intelligent about what you consume.

If you have a good plan, and the conviction to stick with a good plan, you will do well as an investor over time. Being an investor is sort of like being a business owner. You have to be strategic, and you have to devote some time to future growth. That was true fifty years ago, and it’s true today.

More wrong than right

Boys and girls who cry wolf will eventually be right, but are more wrong than right

Mayan calendars, financial crises and the boys and girls who cry wolf will test the mettle of who you are and what you plan to do. It’s always been that way, and it’ll always be that way.

There will be corrections, but there will be long moves forward. You’ll read about high fees and why ETFs** are better than mutual funds, and, in some cases that’s very true, but, what’s even more true is:

  • If you’re avoiding the markets because you’re overwhelmed with information, talk of high fees and the fear that the end is nigh, remember there will always be reasons to set your hair on fire. Markets will correct. Markets will advance. And you’ll always be able to find bad news if you look for it.

The strategy of sticking to your strategy

Get a strategy. Stick to it.

Despite everything, the stock market is still the greatest engine for wealth creation the world has ever seen, and mutual funds are the single easiest investment for the average investor to participate in. The 1 per cent have known about equity markets for a very long time. Information about wealth creation has been widely available for a long time.

While the world may be changing rapidly, especially with respect to communications, investing basics, for the average person, haven’t changed. In a sea of change, there’s still a pattern that holds true.

Keep working your garden

I once watched a gardener working on a Japanese garden. Imagine if he changed his plan every hour and began creating a different garden … Would he ever achieve the aesthetic harmony he set out to?

What separates people from the rest of the animal kingdom is our ability to use our minds. If wealth creation, concerns over retirement or just understanding the great forces at work around us register with you, take a few steps forward.

If you’ve ever watched a baby learn to walk, the kid who’s running like the wind a couple of years later first learned to move forward with a few wobbly steps leading to some serious tumbles as ambition and confidence grew.

Want more information about investing?

Get informed.

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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*I’m a fan of social media when used judiciously. Please see my post Social cosmology: Social media is creating its own multiverse and the series of posts that came before it.
**ETFs are wonderful products, but you need to have a trading account in order to buy them. If you’re struggling to keep track of your mutual funds, a trading account may require more time than you’re willing to invest.

 
Related articles:

$1 Million Invested in Stocks in 1935 is Worth $2.4 Billion Today (If You Held On) (forbes.com)

Teachers’ Pension CEO Says Plan Should Take More Risk (Bloomberg.com)

Written by johnrondina

February 19, 2013 at 4:05 pm

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!

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

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Warren Buffett came out and highlighted the risk in bonds recently. He pointed out that long-term, stocks have a lot less risk than currency-based investments like bonds.

Stocks or bonds? Maybe both

Backing Buffett, the S&P 500 has had it’s best February since 1998. The S&P/TSX 60 has hit a five-month high.

Sadly, RRSP contributions are hitting lows just as the markets have taken off.

There are many reasons RRSP participation has declined: difficult economic times, fear generated by stock market volatility and the effect of demographics are just a few.

If some investors are avoiding the stock market because of fear stemming from the financial crisis, it’s cost them this year. If this becomes a long-term trend, it will cost people in retirement.

In “Bonds: Why you should love the unloved investment”, I discussed the role bonds play in a diversified, balanced portfolio within the context of stock market corrections.

Since the financial crisis, investors have seen a bull market in bonds as people bought “safer” investments like bonds.

But bonds tend to rise when interest rates decline. If interest rates don’t continue to decline, the return on bonds will be limited.

Considering today’s already low rates, is it likely that they’ll continue to decline?

If interest rates go up, the returns will become negative, and we might see the first correction in the bond markets since before the financial crisis.

Bonds vs. the S&P/TSX 60: The return of equities

Dom Grestoni of Investors Group recently said: “Rates are going to start rising, so if you commit to a 20-year bond at 2½% and the market rate goes up half a percentage point, you’re going to part with 30% of your capital.

We’re seeing valuations that are now discounted relative to the past 20 years, and interest rates are at record lows … Would you rather lock into a 10-year government of Canada bond paying 2.1%, with no prospect of growth, or buy a high-grade dividend-oriented stock, like a bank or utility, with yields above 4% … and that dividend is going to grow year after year.

Investors were underweight bonds as stock markets went from outperforming to underperforming during the financial crisis. Many may now be overweight bonds.

Both Buffett and Grestoni are trying to alert investors to this danger.

The mania is the message

Buffett would probably be happy if you didn’t need to listen to him. Some wise investors are already well-prepared.

How can you be one of them?

What Buffett was trying to counter are the manias that investors inevitably fall for. Sadly, most investors go for whatever investment vehicle has been getting the majority of cash flows.

Too many investors arrive late in the game.

Bad news burnout

The barrage of bad news has influenced investors: events in Europe, and other withering news grabbed all the headlines. Have people noticed that news has gotten more positive regarding companies, Europe and the outlook for stocks?

There are still threats amongst the opportunities. Financial news from Europe and the U.S. is mixed though better than it was.

Bonds?

There’s nothing wrong with holding bonds in a properly diversified portfolio. In fact, many managers hold bonds in their portfolios.

As mentioned in “Bonds: Why you should love the unloved investment”, many pundits were calling for a bond correction last year, and it turned out to be a great year to hold bonds.

But the same may not hold true in the future.

In Part Two, I’m going to discuss why having a plan benefits you when it comes to asset allocation within your portfolio.

Chart source: Globe Investor

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

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