Pattie Lovett-Reid: Is it time to invest in the markets during the coronavirus pandemic?
TORONTO -- Is it time to invest in the markets right now? This is probably one of the most frequently asked questions by investors.
I wish I knew the answer but I don't. In our household we also don't try to time the market. Markets timers have to get it right going into the market and getting out of the market. We have always believed slow and steady wins the race. Our approach is to dollar cost average over the years where we go into the market slowly in preset amounts at the same time each month and we come out of the market the same way by taking money out in preset amounts. You don't have to buy and hold forever and we don't. This strategy allows logic to drive our investment strategy and not emotion.
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When it comes to investing we have had one guiding principle - boring is beautiful. We don't want wild swings in our portfolio and lean towards companies with strong balance sheets, reasonable debt, leaders in their industry that not only pay a dividend but increase their dividend regularly as well.
To us diversification matters. We don't invest in only one company, one sector, one currency or one country. We balance our portfolio to ensure our asset allocation is aligned to our risk tolerance, which is moderate. This is where we spread our money over cash, bonds and stocks.
Like you we have worked hard to save and invest and like you we are watching the value deteriorate. Are we worried in times of turbulence - you bet we are.
We were married in 1995 and there have been many market events that had us wondering if we should throw in the towel: the 1997 global stock market crash caused by the economic crisis in Asia in 1997, a technology bubble that burst in 2000, September 11, 2001 attacks, and then in 2008 when one of the largest U.S. financial institutions was allowed to fail, to the current COVID-19 health crisis to name a few.
We haven't sold out of our positions, despite being anxious, and we have chatted with our advisor throughout the process. For us it comes down to the sleep factor: can we sleep at night given the market volatility?
Back to the original question: is it time to invest?
I think it is always time to invest if you have at least a five-year horizon and a reasonable tolerance for risk. These are volatile times and some might argue the markets have gone too far too fast off their lows. Others would argue now is a great time to get in and buy up beaten down good quality stocks that you are prepared to hold for years.
It all comes down to the type of investor you are. Decide whether you are looking to seek a return "of" your investment or a return "on" your investment and that will shed some light on whether now is the time for to invest for you. Take the time to understand who you are as an investor, there will always be another market challenge and the last thing you want to is let your emotions dictate your investment decisions.
Have a plan, stick to your plan and tweak your plan as circumstances change.
However, over the years -- and through many market ups and downs -- we go back to basics.
- Letting cash sit idle: Cash sitting idly in your savings account earns next to nothing, and when you factor in taxes and inflation, you are likely losing money in this low interest rate environment. Develop an investment strategy today. Start investing your money in the market if you have at least a five-year time horizon. Procrastination will destroy your wealth plan.
- Falling in love with your assets: Never fall in love with your investments. You need to have the emotional intelligence to sell underperformers. There is an opportunity cost (finding a better investment) by staying with a loser for too long.
- Abdicating financial responsibility to someone else: Don't do it. No one will care more about your financial future than you. Take control of your financial situation. Set some goals that get you excited. Develop a plan and then respect yourself enough to stick to the plan.
- Don’t try to time the market: It is impossible to really know which sector, market or investment will outperform at any given time. Buy good quality investments and be a long-term investor verses a short-term speculator.
- Understand the impact of compounding, taxes and inflation: The power of compounding – earning income on top of income – should never be overlooked. In fact, it is your secret financial weapon. Unnecessary taxes can eat away your returns and so can inflation – even in a low inflation environment.
- Relying on your memory: Automate your way to financial success. Set up preauthorized payment plans so money comes directly out of your account and is applied directly to debt, retirement savings or into your investment portfolio. Automation takes timing and temptation out of the equation.
- Not knowing what you own: For the record, I like mutual funds but I also like to know their top holdings and how the funds stack up against their peers. I’m for consistent returns over time, as I believe a slow and steady strategy will win the race.
- Overdoing it: No one wants you to save until it hurts or spend as if there is no tomorrow – find a balance.
- Ignoring what you’re worth: Compile your net worth statement annually. Confront your brutal financial facts. Unless you can clearly see how much you owe and how much you own, you will never make the necessary changes to experience financial freedom. Look for ways to free up some money and start investing.
- Leaving money for tomorrow: If you are retired, you do get to spend. Enjoy your life because if you don't, your heirs will.