The Economist wrote in its December 6, 2008 issue, “If savers treated financial assets as they do other goods, they would sell them when they are expensive and buy them when they are cheap. Actually they do the opposite. They piled into the market in 1999 – 2000, at the peak and are piling out of it now.” The Economist is referring to the U.S. market, but here in Canada we have had our own version of this phenomenon. According to the Investment Funds Institute of Canada, in 2007 when markets were near their peak, net sales of mutual funds soared to $34.9 billion, the highest since 1997. By October of 2008, net redemptions were $8.4 billion and year-to-date net sales were just $2.2 billion.
This shift in investor sentiment is understandable. With what has been happening in the markets and the economy in recent months, even the most seasoned investors are finding themselves unnerved. Getting through this period of uncertainty will require a certain degree of discipline and resolve – characteristics that separate successful investors from the rest. Here’s what else successful investors are doing right.
Patience is their Virtue
Patience can be hard to come by right now. As humans we want to respond to crisis with action. Yet taking action, particularly in the midst of a bear market, may not be the best move. Warren Buffet famously once said, “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.” While this may be an extreme position, the underlying message is that long-term investing is about making a commitment The markets have tended to reward investors who have had the patience to stay the course.
They Keep Emotions out of Decisions
A 2008 study by Dalbar Inc. and Lipper, compared the average returns for U.S. equity funds to the average returns for investors holding those funds from 1988 to 2007. While the average annual stock fund return was 11.6%, the average annual investor return was two-thirds less or 4.5%. The reason for the difference? Investor behavior – ignoring their investment policy, giving into emotion and chasing returns.
They Ignore the Short-Term “Noise”
If you choose to seek them out on the Internet or through the media, there is no shortage of opinions about what is happening in the financial world today. Successful investors turn a deaf ear to all this noise. Instead, they stick to the investment policy that they developed using a rational and disciplined thought process.
Timing isn’t their Concern
During a bear market, the idea of timing the market can look quite attractive. If only it was easy to do. In reality, the difference in terms of number of up days and downs days between bull and bear markets is surprisingly small (see chart below). Attempting to call the market requires making big bets and taking on extra risk, something we would never recommend. Long-term wealth is rarely created by trading; more often it is created by owning.
They have Reasonable Expectations
Markets don’t go up 30% ten years in a row. And they don’t decline by 30% for ten years in a row, either. Gains are made, not in a straight-line progression, but through a series of ups and downs where the long-term trend is up. Our focus is on building a balanced investment portfolio with a target rate of return over the years in the 7% range.
They Avoid Self-Destructive Behavior
Chasing short-term returns, attempting to time the market and deviating from their investment plan are how investors can sabotage portfolio performance. Successful investors avoid these behaviors and rely on their investment policy to guide them. And clients who have been with us for some time know, and those who are new to us will appreciate, that your investment policy is developed with a clear, reasoned thought process and is designed to work for you through the entire market cycle, not just up markets, but down ones as well.
Click table in Image Gallery to see Percentage up and down days in the S&P 500 Index from 1950 to 2008.
This article was prepared for T.E. Wealth Strategies by T.E. Investment Counsel.
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