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Money Management

Fighting Fear: Prospering in Volatile Markets

October 02, 2008

Many of us own mutual funds* and/or have pensions that are affected by the recent volatility in the world markets. Some of the factors for the recent downturn in markets are a world economic slowdown, high commodity prices and a collapse of the U.S. sub-prime mortgage market. Given these events and the affect on our portfolios, even the most seasoned investor’s confidence may be shaken.

What can we do to fight fear and prosper in volatile markets?

  • Over long periods of time, stocks have historically been the best investment for outpacing inflation. Time is one of an investor’s greatest allies. Over nearly all long term periods – 5, 10, 20 years and more – stock returns, as represented by the S&P/TSX 300 index have been positive and have outpaced inflation considerably.
  • Market declines happen. Sometimes corrections are good for the market. Business concepts such as the dot com era in 1999 - 2000 looked great in the euphoria of a booming market but in the end had no fundamental backing. The recent downturn is a way to ‘correct’ the lending practices of U.S. banks, U.S. consumers’ insatiable appetite for debt and world wide demand for financial instruments backed by these investments. With the correction, investors are now able to invest in good companies that are now ‘on sale’.
  • Market Timing is a hard task. In an ideal world, we would all ‘time the market’ by pulling our money out of the market when it peaked and investing again at the bottom. But this is impossible in the real world, because we only know the peaks and troughs in hindsight. Staying invested avoids the ’wealth destruction’ that can come from timing mistakes.
  • We’ve all heard the adage "Don’t put all your eggs in one basket". Individual stocks may occasionally ‘blow up’ or decline dramatically, sometimes without warning. For many investors, diversified mutual funds – which spread investments over dozens of securities – offer a good combination of performance potential and reduced risk.
  • No one knows for sure what will outperform next. Over the long term, spreading investments among several asset classes beats chasing performance.
  • Many investors find it difficult to invest when the market is down. A systematic investment plan (also know as a PAC plan) may be one of the best strategies to deal with market volatility.
  • Sell high, buy low. Regular rebalancing of your portfolio reduces exposure to ’hot’ stocks, sectors or geographic regions, which may hold risk of sharp reverses.

For more information on dealing with market volatility, check out another article written by Jim entitled "Travel, Traffic & Turbulence”.

*Mutual Funds are offered through Credential Asset Management Inc. Unless otherwise stated, mutual fund securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions.

®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.

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