Mutual funds can help in an uncertain economy
When markets are volatile, some investors make the mistake of avoiding equity funds while they wait for the "perfect" time to invest.
Successful investing doesn't depend on timing the market. Even financial experts can't accurately predict what the markets will do on a daily, weekly, or monthly basis.
Opportunities are available at every stage of the economic and market cycles. There are always good mutual funds* to be found, that can provide solid performance and superior long-term growth potential.
Seek out quality funds
Be proactive by identifying specific assets, industries, countries, or global regions that you believe offer the best value and opportunities. Then, choose funds that concentrate on those areas. Another way to strengthen your portfolio is by selecting fund managers with a good track record and reputation, whose management style and investment objectives match your own.
Asset mix also has a major impact on performance and overall portfolio volatility. Review your mix of equity* and fixed income funds to ensure that it is in keeping with your accumulation goals and risk tolerance.
Fundamental truths about investing
Regardless of the economic condition, it's important to remember some key points regarding investing in any economy:
Markets provide superior performance but the downside is volatility.
Historically, stocks of large North American companies have outperformed the bonds of those same companies by a margin of roughly 1.75 to 1. However, along with superior performance comes volatility. As a general rule, stock markets make money roughly three out of four years. That means, of course, they lose money that fourth year. The markets generally do well enough 75% of the time to offset the 25% sub-par performance. If stocks were not risky, they would not provide a superior return.
Short-term instability cannot be avoided.
We would all love to perfectly time the ups and downs of the market. Unfortunately, that's simply not possible. Investing always entails a combination of pain and gain – the only question is when they occur and does the gain eventually out weigh the pain. When periods occur like during the recent recession, the pain of investing is immediate; the gain is in the future. If you avoid the markets altogether, the peace of mind you gain is immediate but the pain in lost opportunity and retirement lifestyle lies down the road. In times like these, sitting on the sidelines can be a tempting option if you truly can't live with the recent volatility. However, history shows that when stocks recover from a significant drop, they tend to do so very quickly. Being out of the market can mean missing a rise of 25% or more.
Volatility decreases the longer you invest.
The good news about volatility and risk is the longer your time horizon, the less of an issue they are. Looked at over periods of five or ten years, the variations in returns are reduced to a fairly modest level. For investors who need to cash in their savings in the very near term, these markets do indeed pose a real problem. But based on historical experience, for investors with a time horizon of ten years or more, volatility decreases to the point that it's almost a non-issue.
Investing based on emotional reactions can be devastating.
If your portfolio is well balanced and relatively conservative, you will generally be somewhat insulated from the effects of a crash. Emotional reactions can, however, be fatal to a well-balanced portfolio. There's a common expression that most investors fluctuate between fear and greed. Excessive optimism dominated; followed by fear and pessimism and now moving to cautious optimism. Making decisions based on fear can destroy value in a portfolio. Your investment professional should act as your emotional anchor, preventing the emotional swings from being too dramatic.
Historically, the right managers will prove their worth over time.
Your investment professional should help you select money managers based on their strong investment convictions and discipline, consistent performance over an extended period of time and a track record of containing losses in downturns. Although you may be concerned that your advisor is recommending standing pat in the face of turbulent markets, it's important to understand that while no changes are being made to the funds you hold, beneath the surface your portfolio is being modified as these managers realign the stocks they hold to capitalize on opportunities.
Systematic investing in mutual funds helps manage risk
Making regular investment contributions means you'll always be invested. Systematic investing also helps to reduce volatility over the long term, because you buy more units when prices are low and fewer units when prices are high. Staying invested means that your money keeps working towards your goals through all the highs and lows.
Contact your BlueShore Financial financial advisor to discuss your investment plan today.