August 2003 - Nr. 8
Financial Advice
Eduard Pohlmann
is a professional financial consultant with Investors Group, an industry
leader providing comprehensive financial planning and services. He is a
frequent speaker and commentator on financial planning and investments.
Emotionally Driven Investment Decisions Can Be Costly! CAN YOU AFFORD IT?
August, 2003
For the past 18 months or so, stock markets have experienced more ups and downs than the executive elevator at Enron’s head office. Unfortunately, over that period, market downs have been steep while market ups have been more like hiccups. It’s in trying times like these that investors tend to get emotional - and why not, watching the value of your portfolio erode with falling share prices is never fun. But, what the current market cycle also proves is this: When it comes to investing, emotion costs while listening to the voice of reason instead of your fears usually pays off over the long term.
In some very simple yet important ways, the rules for profitable investing are similar to those for taking an enjoyable holiday by car:
Plan to drive your portfolio to a successful financial destination - and stick to your plan. Before you leave on a cross-country trip, you map out the best way to reach your destination. The same should be true of your overall financial plan - assess your current location and future destination, and map out a multifaceted financial plan that’ll get you there. Sure, there may be detours and side trips along the way, but always keep your eye on ‘the big picture’ - the financially successful destination you’ve established for yourself.
Keep your eye firmly fixed on the road ahead. Just like driving a car, steering a portfolio by looking in the rear-view mirror is not recommended. Here’s why: A recent survey* commissioned by one of Canada’s largest financial services organizations suggested that the majority of Canadians are verging on letting their fears get the better of them as they prepare to make their annual retirement savings plan (RSP) contribution. According to the Investors Group/Decima survey, almost two-thirds of Canadians are less enthusiastic today about investing in the stock market than they were a year ago - a strong signal that emotion and expectations of continued stock market volatility, may be driving them to select interest-paying investments, such as guaranteed income certificates (GICs). But, looking in the rear-view mirror and chasing last year’s performance by rushing into GICs could turn out to be a significant portfolio driving error because the emotions of investing usually run opposite to reality. When markets are at their peak, people lean toward investing in equities and equity mutual funds; when markets are down, people become less enthusiastic about investing in equities. Unfortunately, this often means investors are buying at market peaks just before a downturn and are hesitant to buy when markets are down and the possibility for solid gains exists.
Interest-paying investments, particularly in periods of low interest rates, can be expected to produce low returns - often averaging in the range of just one to three percent above the annual rate of inflation. On the other hand, equity investments generally produce average annual returns of three to seven percent above the rate of inflation over the longer term.
The conclusion is clear: If you want to be in a financial position to retire at the age of your choice, you cannot afford to squander opportunities to help your investments grow. That’s why it’s vital to maintain an investment strategy that keeps you on the right road to your ultimate goals.
Changing lanes can actually slow progress to your destination. Like drivers who frequently change lanes in traffic, people who try to maximize gains by switching in and out of hot performing funds often end up taking much longer to get where they’re going - earning less than half the returns on the average equity fund. In fact, from 1984 to 2000, the average equity fund (based on U.S. data) had an annual compound return of 13.1 percent while the average equity fund investor only earned an average annual compound return of about 5.3 percent**. Over this period, average fund securityholders lost out on about 60 percent of their total possible return for one simple reason: They too often pulled out of funds precisely when they were bottoming, and bought into other funds just as they were peaking.
Study after study has shown that it’s not market timing that counts, it’s time in the market. Past performance is not a predictor of future results so it’s extremely important to have a plan and stick to it - an adequately diversified plan that helps to guard against performance swings and market volatility.
A well-designed investment strategy with a long-term view provides an excellent roadmap that helps take emotion out of the driver’s seat. Your financial advisor can help ensure your financial plan includes an appropriate balance of equity and fixed-income investments that will keep you on the right road to achieving your personal financial objectives.
* Investors Group - Decima National Survey,
released November 2002
** Source: Bogle Financial Centre
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact Eduard Pohlmann .
