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Nearly 80 years ago, following the 1929 stock market crash, the New York Times published this article:
Stock prices slump, $14,000,000,000 in nation-wide stampede to unload.
Given today’s investing climate, it’s possible the next headline could be similar. People I meet are, justifiably so, getting nervous with the current market conditions. It is always difficult to see earnings or capital eroded by a market downturn.
Many times in the past, markets have plummeted as crisis occurred. Often, they rebounded quite quickly. One such example is 9/11. Following the terrorist attacks, the markets dropped over 10% in one week. 47 days after, they had regained their value.
When it comes to the stock market, if history has taught us something, is that it goes up and down… on the way up. As an investor, you have choices. You can flee, you can stay put or you can invest some more. History also suggests that the point of maximum fear in the market may also be the point of maximum wealth creation. Buying near market declines maybe the time of greatest opportunity for wealth creation.
Would you be among those bailing out of today’s market? Or, are you seizing the opportunity?
Today may be a similar wealth creation opportunity. Now may not be the time to bail out or retreat from markets. Now may be the time to invest in high-quality businesses at attractive prices.
That being said, what else can you do?
1. Establish your goals and your investment profile
The first step is to take time to establish your investment goals. What are you investing for? What are your lifestyle objectives? How much do you need to accumulate? When will you need to start drawing funds from your investments?
Once you have answered these important questions, then it’s time to assess the type of investor you are. How do you feel in market downturn? Do you lose sleep? Do you get emotional? Do you get excited about the opportunity? What do you do with your excessive cashflow?
Honest answers to these questions and many others are key in establishing the type of market risk you should be exposing your capital to. This is key as overexposure or underexposure to the market may put your goals in jeopardy.
2. Minimize the downside, maximize the upside
Once you have determined the level of exposure to the stock market you should have, it is important to identify an investment style that catches the least of the market downside, and the most of its upside. At this point, a comparative analysis of different investment style and investment vehicles is required. Look at track record. What happened during the last market downturn?
3. Discipline, Discipline, Discipline…
Don’t go chasing after returns. Even if your annoying brother-in-law is bragging about the latest flavor of the month bringing him outstanding returns, don’t let that take you off your path. I often make the analogy with standing in line at the grocery store’s cash register. The other cash register always seems to go faster… until you switch lanes. Then, the one you just left picks up…
You have established your goals. You’ve determined your tolerance level to market volatility. You have a sound game plan. Stick to it!
Hugues Raymond is a partner in Chelsea Financial, located in Chelsea. For advice in establishing your goals and objectives, you can contact Chelsea Financial via e-mail at info@chelseafin.ca, or by phone at 819-827-4747.
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