The Roller Coaster Markets
Volatility in the stock market can upset even the most experienced investor. However, it is important that you keep your eyes on the horizon, staying focused on the long term. History has shown that investors with a well thought out financial strategy, who invest for the long term, usually enjoy positive results. Successful investing is most often based on time, not timing. Even experts cannot always predict what the market will do – the difference is that they don’t jump into and out of the markets either.
But what does all this mean to you today? It’s simple. Stay invested and don’t try to time the markets. We know that this is often easier said than done, especially when the markets are fluctuating wildly as they have over the past few weeks.
Over the past few years many investors have reaped the rewards of a strong Canadian stock market. It seemed like as long as your mutual funds had those dividend paying things and those Canadian bank stock gadgets in it, your investment portfolio was performing well. I admit I’m a big fan of the Canadian Banks and I believe they are excellent investments and are exceptionally well run businesses. But…. they are only one piece to a well-diversified portfolio. Recently banks have been the victim of continued sell off’s and profit taking. Investors are still skeptical to their involvement in the US subprime mortgage issue. So is this worry really justified? I’ll answer that with a question of my own. My question to you is: Have you ever tried to get a mortgage or loan from one of the 5 major banks? They aren’t handing out loans to just anyone anymore!! The banks will be reporting their quarterly earning within the next month and typically there is a bit
of a run up in the price of the bank shares leading into their reporting. Let’s see how investors react to this quarters earnings before we start labeling any trends in the financial sector.
Ok, so if holding a portfolio of the 5 major banks is not a well-diversified portfolio, then what is?
There is many ways to explain diversifications, there is diversification between sectors, whether it is the financial sector we spoke about earlier or the Telecommunications sector we have heard some much about in the news recently. There is Global diversification, by having exposure to the growth of the global markets. You can even narrow diversification down to the vehicles you use in your investment portfolio. The closer you come to retirement the greater the need for an increased fixed income component, whether you hold, Bonds, GIC’s, Money Market, T-Bill’s etc.
It’s easier to see the value of a well-diversified portfolio especially in times when the markets mimic a roller coaster. Your portfolio will allow you to grab the gains of the markets in a bull run but it will also protect you on the downside when markets aren’t performing as hoped.
If you have any questions regarding diversification in your portfolio, please do not hesitate to call me.