– “The market will fluctuate.” That old bit of market wisdom is ascribed to
Gilded Age financier J.P. Morgan, and is as true today as it was a hundred
years ago. The primal emotions of fear and greed are ultimately at the
bottom of all market movement, and they take turns confounding market
watchers, analysts, and investors. Trouble is, no one ever knows when there
will be a market top (or bottom).
Currently the markets are scaling new heights, with the major equity
indices marking record highs almost daily. Take a look at the chart below.
One of the longest bull market phases in history just keeps piling up new
gains. That has some market watchers taking defensive positions, worried
that valuations are far too rich and that a correction can’t be too far
away. But other investors are wondering whether they should sell their bond
holdings, gather all their cash, and plunge everything into stocks to try
to cash in on the last market blast before a blowoff occurs.
However, neither of those approaches would be the prudent choice. That’s
because both are really emotional responses to the prevailing market
condition – one response is fear (“Valuations are too rich, and I should
get out now!”) and the other is greed (“Valuations are too rich, and I
should get in while I can!”). And both are bound to fall short of the
investor’s ideal outcome for a very simple reason: No one can ever know
precisely when a market top (or bottom) will occur, and attempting to do so
– a process called “market timing” – often ends in either steep losses or
Instead of reacting to unusual market conditions with an all-or-nothing
attempt at market timing, the most successful investors apply three proven
investment management principles.
When you and your advisor develop an investment strategy and build a
portfolio to execute that strategy, you’re doing it to achieve a stated
financial objective within your risk comfort zone.
For example, you might have settled on a broad asset mix of 10% cash and
risk-free holdings, 50% fixed-income, and 40% dividend-paying equities.
That allocation will serve you well, but only if you stick with it. Your
equity holdings will fluctuate more than the other allocations, of course,
but that should be offset by income from dividend-paying securities and
from the less volatile fixed-income allocations. In other words, you have
diversified your portfolio to mitigate the risk associated with a
concentration in just one type of security.
Whichever strategy you’ve decided on, the key is to maintain investment
discipline. Market conditions change continually. If your portfolio asset
allocation met your needs before, and the security selections made sense,
what’s changed? Are those big blue-chip companies suddenly on the verge of
bankruptcy? Will the government default on its bonds? Of course not! But
the markets will fluctuate. The discipline lies in making sure you don’t
blow up your portfolio at every turn – because you’ll almost certainly do
it at the wrong time.
The longer you apply your disciplined approach to portfolio management, the
more likely you are to meet your objectives for wealth creation. For
example, a $10,000 investment, with $100 added monthly, growing at an
average 7.5% return compounded annually, would be worth $96,400 after 20
years. Only $34,000 of that would be deposits you’d have made. The rest is
Why did I choose the 7.5% rate? That’s the annualized rate of return for
the S&P/TSX Composite Index returned over 20 years to the end of 2016.
Over that period, of course, the stock market has gone through a number of
bull and bear cycles, which would have tempted many fear-and-greed-driven
investors to jump into or out of the market at precisely the wrong time.
The important principle here is that you’d have made this small fortune only if you’d stayed in the market. And you’d have done that only
by exercising patience.
The third principle, prudence, acknowledges that you are unlikely ever to
achieve your goals by acting on “hot tips” or “great ideas.”
When you establish your financial objectives, define your true
risk-tolerance level, and decide on an appropriate asset mix, your
framework for wealth creation still needs a systematic method of selecting
individual assets with which to populate your plan. It’s here that you want
to have the
best professional asset management talent available with access to top-notch research and financial analysis tools.
You can always do it yourself if that sort of intensive number-crunching is
in your wheelhouse. For most people it isn’t, so it makes sense to hire the
expertise. Ask your financial advisor who they use for asset management and
what their financial-management philosophy is. Get the facts and figures
and proof of performance.
With the application of investment discipline, patience, and prudence,
you’re much more likely to achieve your financial goals. And you won’t have
to worry about what the market did yesterday. – Robyn
Robyn Thompson, CFP, CIM, FCSI, is the founder of
Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management
for high net worth individuals and families. Contact her directly by
phone at 416-828-7159, or by email at
for a confidential planning consultation.
Notes and Disclaimer
© 2017 by the Fund Library. All rights reserved. Reproduction in whole or
in part by any means without prior written permission is prohibited.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned are illustrative only and carry risk of
loss. No guarantee of investment performance is made or implied. It is not
intended to provide specific personalized advice including, without
limitation, investment, financial, legal, accounting or tax advice. Please
contact the author to discuss your particular circumstances.