"Savvy" Investing

I was flipping through a copy of Chatelaine magazine last weekend and happened onto the horoscope page where I read my (Virgo) October prognostication:

"Your financial savvy will improve the lives of others this month. Projects coming together around the 10th require up-to-the-minute efficiency, which just happens to be your specialty. Powerful people will be suitably impressed."

I do not normally put much into horoscopes, but this one was definitely hitting close to home and what pressure (this month)!

(Savvy – noun : Also, sav·vi·ness. practical understanding; shrewdness or intelligence; common sense)

I do not think my advice is particularly shrewd, but it is full of common sense:

My clients have structured financial plans: we (our team) know and understand their cash flow needs. In times of financial market volatility, like those we are experiencing now, being forced to take a sale to provide liquidity for lifestyle needs can be devastating to the long-term validity of the plan. So we hold a percentage of liquid, money market instruments that allow for this cash flow need. In fact as markets made new highs in 2007, we were selling off small portions of profitable investments to increase our cash cushion (if a correction occurred and new opportunities arose this money could be re-deployed).

As we watch the total value of the portfolio decline (with the current market volatility) I remind my clients of the financial markets' ability to recover (historically), to guard against the emotional reaction of wanting to sell good investments that are being re-priced lower in daily market trading activity and that we have the necessary liquidity to ride out the storm.

The Media will be busy counselling us all on the dire circumstances and the potential for disaster which will seem rather daunting and compel us to re-think our strategy: but history shows that market bottoms are made when selling is the most aggressive and market tops when buying is most euphoric.

Our brains are programed this way: it is our evolutionary psychological make-up. Our natural instincts for survival are to avoid pain. The sight of a declining portfolio is painful, the natural reaction is to cut out the pain: ie. sell.

This, however, is historically proven to be the incorrect action when it comes to long-term investing (especially because our prudent investment strategy has allocated assets accross a diverse spectrum) .

On average, the markets take 16 months (S&P500) to 20 months (S&P TSX) to reach the previous peak from their respective bear market bottoms.

This implies an 18% to 23% annualized return over those recovery periods for the S&P TSX and S&P500, respectively.

Some might be inclined to throw out the old adage: "but this time it is different".
They are right, every market correction or bear market is the reaction to a different stimulus that causes "investor concern" and a loss of confidence.
But it will recover, it always has.

Time is the only variable. So we need to have the appropriate plan that will allow us the flexibility to be able to stick to that plan.

Need help with that plan? Call/email me.

It may not be shrewd, but it is common sense: Savvy