Riding the Emotional Roller Coaster

Assuming you have picked up a newspaper in the last 7 months or somewhere heard a "solution to the problem" from financial experts around the world, you are enjoying the thrills and spills of our economic amusement park.

It's no mystery that we have been in a Bear Market this last 7 months; we won't deal with the question of why it happened. That has been widely talked about, and I have my own opinions as to where the real foundation of the problem was rooted but we can discuss that at a later date. What I would like to discuss is how should we react to these "corrections" in the market and is there positives to be found in such so-called "difficult times?".

How should we react?

The short answer is to take our emotions out of investing, and I would like to stress here both in "bull markets" and "bear markets". This can be very difficult to do in the "flat world" that we are living in with updates every second as to which stock is hot and which are not and advice provided daily, structured around multi-platformed strategies from Banks, Investment Companies, Investment Magazines and Newspapers. It is very easy for an individual to be caught up in all this madness and stop making decisions logically and start making them emotionally based on what we are being told by numerous teams of "professionals" in every imaginable form of communication.

Let's look at a couple examples. In June 2008, this headline was in the Financial Post: "Parked Cash Could Fuel Bull Market." Also in June, an Investment Executive (who will remain nameless) said "Canadian Equity Funds with Solid Performance." What followed was one of the largest drops in market history.

The absolute basics of investing as most people know are to Buy Low and Sell High. Yet if you were strictly to follow the news, the papers, the magazines you would be hard pressed to find one that says Sell when things are good and Buy when things are bad.

What do we read when things are bad?
January 6 2009 Financial Post "Stock Markets will Remain Dangerous."
January 15 2009 Globe and Mail "It's really gloomy out there."

The Canadian investor follows this investing pattern, Buy High and Sell Low (being sarcastic but speaking truth here). We follow headlines, we listen to news casts and we act IN THE MOMENT.

In 2001 we experienced something similar, the Tech Bubble and 9/11. Over a span of about a year and a half the TSX dropped approx 5,000, points to a bottom of 5,600 in the month of Sept 2002. As you can imagine the headlines dealing with the market were much the same as we are seeing right now. What happened over the next 2 years? Well the TSX reclaimed those 5,000 points. In fact, from Sept 2002 to Sept 2007 the TSX went from 5,600 to 14,600 points. Imagine if you had invested on Sept 2002.... Also imagine if you had sold in Sept 2002, what you missed out on...

I won't deal with numbers and returns because I personally am not an advocate of Market timing. I am though an advocate of Long Term Investing and proper portfolio management. The closer you are to needing your money, the less aggressive your portfolio should be; the longer you have in the market the more aggressive you should be.

If there is one thing you can take away from this let it be this quote from an extremely successful Investment Advisor:


“The success or failure of a long-range savings plan is not predicted on its rate of return, but the consistency of putting money away regularly and leaving it there.”

Bernard Baruch, financial advisor to the Rockefeller's and the Kennedy's in the 1920s and 1930s

I strongly agree that his statement still holds its truth today and should be the basis of every individual's financial plan. The headlines of the Times and Globe and Mail should not determine your personal decisions about your investments.

Do you also agree? I would love to hear what you think.

Have a great week!

Matthew George