Investing rules for volatile times

Zoomer | January 1st, 2006

Almost 40 years in the investment business, and I still marvel at how market sentiment can turn on a dime.  We can be euphoric one minute, paranoid the next. One day the sky can be the limit, but the next day, it could be falling. In an instant, push-button world, the year 2000 brought more sudden mood swings than any year yet.  Particularly unnerving was how the high-tec/dot-com sectors soared to heights that defied all reason, then plummeted to levels where many of the survivors represented good value. Except then, nobody wanted them. 

When the all-powerful U.S. economy finally entered the slowdown phase we had been praying for, rather than rejoicing, we began worrying that it could portend recession, or something worse.

Volatility like this is not only disconcerting for seasoned professionals, it can be disheartening for ordinary investors. And it’s downright dangerous for that multitude of get-rich-quick, point and click dabblers who last year experienced a savage bear coming right out of their screens to maul them.

Stand back
If last year taught me one lesson all over again, it is to stand back from the noisof the crowd at times of extreme hype and nervousness. We should remember that if we do what everybody else does, we can only be average. By detaching ourselves from the crowd, we can become above-average investors. 

What counts most is the correct positioning of our portfolios, using the golden rules of:

  • Balance
  • Diversification
  • Focusing on top-quality equities and equity products.

Thereafter, we only need to control risk and surprise-proof our portfolios in order to possess the key to the superior performance that is sure to follow.

This said, we should be under no illusions about the unforeseen dangers and surprises that lie ahead in a period of watershed transition.  Above all, there is the high-flying American economy coming in for what we hope (but can’t be sure) will be a soft, rather than a hard, landing.

Turbulence could continue
Two other related developments will also need time to play out;

    1. The new and old economies finding the levels at which they can co-exist
    2. Investment markets establishing more comfortable — and better based — relative valuation levels from which to launch their next upward thrust.

Hence, the turbulence and volatility of 2000 could well continue into 2001. Our month-end investment statements are likely bound to bring discomfiting reminders of these adjustments as another eventful — and volatile — year unfolds. 

Please remember, however, that market pullbacks won’t matter as long as our portfolios are properly positioned and we are not obliged to sell. With customized and properly structured investment plans in place, we will be able to take advantage of the bargain opportunities that such pullbacks present. 

Positioning, positioning, positioning  — it’s all the more important at our stage in life.

Stay committed
In the past, I’ve stressed the related importance of determining what we require from our investments by coming up with our personal number in total dollar or rate-of-return terms, and then positioning our portfolios to achieve this number. 

In earlier articles I stressed how we have more time on our side than we may realize.  The two dynamics of “number” and “time” add up to the systematic, longer-term approach I have harped on ad nauseum. 

To these add the facts that:

  • We can’t build investment wealth by retreating to the sidelines
  • It’s the equity sections of our portfolios that must build the sustaining investment wealth we are going to need. 

This means we must stay committed regardless of day-to-day market volatility.  At this fickle juncture, I also recommend:

  • We focus increasingly on Canadian equities (and equity products) to help achieve the longer-term investment targets we have set ourselves.

Everywhere around the globe, ordinary people are awakening to the need to build wealth through investment.  In an intensifying worldwide search for wealth-building equities, Canadian companies are going to become recognized as ranking with the best. 

As a result, I see today’s new-look Canada as a place for overall as well as individual investment attraction.  Hence, let’s resolve to stand back from that nervy professional crowd and position ourselves to achieve our investment goals with an increased and commendable Canadian equity bias.

Michael R. Graham, Ph.D., is president of the independent investment counselling and management firm, Michael Graham, Inc.