Brexit? Trump? The Dow? Climbing the wall of worry

The market will fluctuate – get used to it!

Stock markets seem to be reaching record highs every day. Toronto’s S&P/TSX Composite Index is the top-performing market in the world so far this year. Yet endless storm clouds seem to be gathering permanently on the horizon: Brexit; the U.S. election; negative interest rates in many developed countries; and on and on. Should you pay attention? Yes, most definitely. But should you start selling off your assets looking for the (probably mythical) “safe haven”? No. Here’s why.

What markets will do

When asked what the market will do next, Gilded Age financier J.P. Morgan reportedly replied, “It will fluctuate.” It’s the only prediction you can make with any certainty. What drives markets is fear and greed. But no one really knows precisely when one force will take over from another in the grand cycle of market ups and downs. As many market veterans are all too aware, calling market tops and bottoms is next to impossible.

Yet astute investors continue to make money in securities markets, generating handsome returns in their portfolios year-in, year-out, regardless of the crisis of the day. That’s because the most successful investors apply three proven principles that never fail.

  1. Discipline

When you create a long-term financial plan, you want to see your wealth grow within your risk tolerance level.

If you’re a more defensive investor, but still want to take advantage of the growth potential of equity markets, you might have a broad asset mix of 10% cash, 50% fixed-income, and 40% conservative dividend-paying equities.

That type of portfolio allocation will produce results, but only if you have the discipline to stick with it. The equity portion will naturally be more volatile, but that should be offset by the lower volatility of your fixed-income holdings and the income from your dividend-paying shares. With risk spread across diverse asset classes, your overall portfolio won’t suffer as severely in those inevitable market downturns.

But discipline is critically important. If you succumb to the “fear” part of the fear/greed equation because of Trump or Brexit or Greece or what have you, you’ve made a fatal mistake in your financial planning (just as much as if you start buying all kinds of speculative stocks just as markets reach record highs). If your asset allocation was good before the current crisis, and your security selections made sense then, what’s changed? Have those big blue-chip companies gone out of business? Will governments default on their bonds? Of course not! 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.

  1. Patience

The longer you stick with your plan, the more likely you are to achieve your wealth creation targets, regardless of market fluctuations.

Research has shown that stocks outperform virtually every other asset class over the long term. The Canadian benchmark S&P/TSX Composite Index, for example, has returned an average 8.04% compounded annually for 20 years, as of July 31. That means a $10,000 investment 20 years ago in the S&P/TSX Composite, with only $100 added every month, would today be worth $110,827! 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.

  1. Prudence

When you’ve settled on your financial objectives, risk-tolerance, and an appropriate asset mix, your next step is to select individual assets for your portfolio.

It’s here that you want to have the best professional asset management talent available. You won’t be devoting a lot of time to speculative junior stocks. You’ll want to do your research and know what you’re investing in, including the history and outlook of any company you want to own.

If that sort of analysis isn’t in your wheelhouse (and for most people, it isn’t), hire an expert. 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. It’s your money. Treat it prudently, and give it the respect it deserves. It’ll pay you back handsomely.

© 2016 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

Brexit? Trump? The Dow? Climbing the wall of worry was last modified: August 21st, 2016 by robyn