A voice of reason

A voice of reason

Fall 2008

With market turbulence dominating the financial news in the third quarter, T.E. Wealth offers clients the benefit of our experience and guidance for weathering the most recent bout of uncertainty. Our view is that in times like these, a prudent investment policy will prove its value. The following is taken from a letter written by one of our consultants, Robert Bentley, a Vice President in the Toronto office, to address a client’s concerns.

You asked if we are staying the course and sticking with your plan in light of the latest market turmoil. My response reflects thoughts that are more personal rather than market-focused, as I spend little time watching market moves from one day or week to another. This is not because I do not depend on the capital system for my ultimate financial well-being – both my and my wife’s personal “wealth” is entirely in the real estate we use and the RRSPs that we have accumulated over the years. Our exposure to equity markets around the world is like many clients – about 60% of total. So, I should be very concerned about falling markets, “panic on Wall Street”, Americans bailing out of homes they could never afford in the first place, China and India slowing down from phenomenal growth rates, Canada selling less stuff to those in other countries and any of the other market and economic concerns that seem to be emerging daily.

But the fact is, none of this worries me in the least. I am not a stupid person with my head in the sand, so how can this be? Simply, it is because I have no fear that my paper losses will become permanent, as long as I hold on to the well-diversified funds that make up our portfolio. I am sure that somewhere in my U.S. equity holdings I have some exposure to the investment banking companies, mortgage lenders and insurance companies that have failed in recent weeks. But this is all part of the push and pull of equity investing, which means that I also hold many other companies that are not going to go bankrupt, and in fact will continue to grow quite nicely after we pass through the current rough times. If everyone stops drinking Coke, shaving, taking prescription medicine, shopping for groceries, buying cars and other goods, then I will have some problems, but I don’t see that happening, especially with a growing world population of consumers coming down the line.

I sometimes think there must have been a financial advisor back in Rome in the 400 ADs, who told her clients back then that there was nothing to fear unless they believed that the empire was truly failing and that the barbarians were at the gate! But seriously, is the American/European/Asian/South American worldwide system of making goods and trading back and forth at a profit really failing now? I don’t think so. Not with a world population that is expanding and generally experiencing unprecedented levels of wealth.

So maybe what we have before us is a “protracted” slowdown, a step backward, and maybe it will be a relatively deep one. In a way, it should be, as we have had a wonderfully good run over the past several years. So, if we see the possibility, the probability, of a protracted back-step, you may be wondering why don’t we sell some equities now and sit in cash for awhile until stocks are even cheaper, then buy them all back and enjoy the inevitable ride up again? This would be a wonderful strategy if we could employ it in retrospect. In reality though, any timing decision we make must always be done with no real knowledge of where markets will be in the next few months, and, at the same time, with a high degree of confidence that markets over time will continue to grow beyond their past highs. We have history to guide us there, and demographics that suggest no reason to expect a different future this time.

The problem with timing is simply that it doesn’t work, the result of a combination of the unpredictable moves of the market and the predictable psychology of investors, who invariably get caught up in the short-term trend, expect it to continue, and miss getting in anywhere near the cyclical bottoms of market cycles. In short, they get “whip-sawed” and hence fail to benefit from the incredible power of market expansion that has never failed to follow the down times. It is ironic that they seem to struggle purposefully toward a goal of repeatedly turning paper losses into permanent ones. In my experience, the only saving grace for these people is that they rarely measure their portfolio’s true performance over the years and decades, and so never really know the extent of the disaster they have wrought on themselves.

I have no intention of being one of those people, so I will keep my discipline through expanding and contracting markets. In times like now, our cash additions to our accounts will naturally move into asset classes that are being hardest hit. That will guarantee me a relatively low average cost, and most importantly, it will ensure that I am there to participate in the inevitable ride back up.

While others may think that I am exposing myself to hugely powerful market forces that could wreak havoc on my long-term wealth, I know the truth – I am in fact that power, I am the only power that can do that to myself and I have no intention of doing so.

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