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The Upside of Down Markets

This article was originally published in the Winter 2007 issue of Moving Business Forward for the Guelph Chamber of Commerce.  To download the PDF of this article click HERE.

 

There are over 100 stock markets in the world.  The largest is the New York Stock exchange and the oldest is the London Stock Exchange which was founded in the 1700’s and formally named in 1801.  Its first major crisis was in June of 1815 with the battle of Waterloo.  Because of that event a man named Nathan Rothschild made a million pounds in one day which would be the equivalent of roughly 4 billion US dollars today.  Investors became nervous and Nathan had inside information.  When it was all over, he uttered those famous words, “You buy when there is blood in the street”.  You buy when there is blood in the street even if it is your own.  You buy when nobody else wants it.  Investing is the only business I know of that when things go on sale, nobody wants to buy it.

Most people think Investing is a business of numbers.  We take them and extrapolate them out into the future.  Like this one.  In 1977, when Elvis Pressley passed away, there were roughly 1400 Elvis impersonators in the world.  Today some 29 years later, there are roughly 45000 in the world.  If impersonators continue to grow at this rate, by the year 2030, one in 4 people in the world will be an Elvis impersonator.  Why do I tell you this?  Apart from trying to scare you with the though of having so many gyrating hips around us, it is to make a point.  Investing shouldn’t be about numbers.

Do you know that billion minutes ago was the dawn of Christianity 2000 years ago?

There are five things that will determine the outcome of your investment portfolio over the long term: #1 how much you invest; #2 how often you invest it; #3 how long you invest it for; #4 the tax consequences; and #5 is the rate of return.  What do we all focus on?  The rate of return!  It is the one component we have no control over yet it the one everyone focuses on.  Here is an analogy for you.  Imagine a child playing with a Yo-Yo going up an escalator.  Focus on the escalator, not the Yo-Yo.

When you started thinking about saving for your future, you may not have anticipated the ride would be so bumpy. If you’re currently invested in equities, you know recent market changes have made the ride seem that way.

When markets go down, you might feel less optimistic or even despondent, yet this is the time for greatest opportunity. Buying when prices are low means you’ll own more units.  Stock market volatility means it will go up as well as down; and when it goes up, you’ll have bought more fund units at a lower cost.

Another effect of a turbulent market is that, along with poorly performing companies, stocks of good performing companies are sold, reducing their stock prices. Instead of thinking only about the markets being down, take the perspective that good companies are currently on sale. When we see something on sale, we generally want to buy more.

A popular misconception is that the key to successful investing is to buy low and sell high. However, most of us can’t successfully time the market. As a result, one of the principles of investing is to look long term – buy and hold. Often, however, emotions get in the way.

Euphoria occurs when an investment reaches its point of maximum financial risk– a good time to sell or hold. At this point, you may choose to increase your investments since you probably want more of that good feeling despite the investment possibly being overvalued.

Other emotions follow during the normal market cycle, until depression which occurs at the bottom of the cycle, the point of maximum financial opportunity, a good time to buy or hold investments. At this point, a well-designed financial security plan can flourish. The world’s most successful investors use these opportunities to capitalize on doubt and fear. A true financial planner can help you develop a plan that will take advantage of this environment.

While we can’t predict when it will happen, market recovery is inevitable. Over the long term, equities outperform bonds.

If you have experienced some of these investment emotions lately, step back and look at your big picture. Have your financial security goals and needs changed? Has your risk tolerance changed? Do you still have a long-term outlook? If you have questions about your portfolio and concerns about how it is handled in the future, talk to a professional. As they can help you maintain a solid perspective and help ensure you stay on track.