6 Investment Fundamentals To Remember
During any period of uncertainty, it is wise to review some fundamental truths about investing…
Following are the 6 principles that guide our approach in the advice we give and the wealth creation process we follow…
1. Well-chosen stocks outperform every other asset class over the long run…
The U.S. stock market provides the best data over a long period of time, with good information going
back to 1925. If we go back over that time (which includes the great stock market crash and depression of the 1930s), stocks of large American companies outperformed the bonds of those same companies by a margin of roughly 1.75 to 1.
That means the money made from stocks was almost twice that from bonds over five years, and
with compounding, nearly three times that of bonds over a 20-year time frame.
(See article: The Andex Chart And What It Means To You And Me)
2. The price for superior performance is volatility!
Along with superior performance comes volatility.
As a general rule, stock markets make money roughly three out of four years. That means, of
course, that they lose money the fourth year; the reason stocks are a good long-term investment is
they do well enough in the 75 per cent of the time they make money to offset the 25 per cent of the
time they lose it.
Academics call the margin of out performance for stocks over cash “the equity risk premium”.
In fact, the academics state that if stocks were not risky, they would not provide a superior return—stocks have to provide higher returns over time to compensate investors for the volatility.
If they weren’t volatile, their return would be the same as that of GICs…
3. Volatility cannot be avoided in the short term!
We would all love to own stocks when they rise and be on the sidelines when they fall.
Unfortunately, that’s simply not possible. If you were to ask a group of investment professionals to name someone who did a consistently great job of picking stocks over a long period of time, a number of obvious candidates would emerge—John Templeton globally, Warren Buffett in the United States, and Bob Krembil in Canada.
(See article:The Wisdom Of Sir John Templeton)
Ask those same professionals to name someone who has consistently predicted when to get into
and out of the stock market and you would draw a blank.
Many people have made one, two, or even three good calls on when to get out of the market.
However, no one has demonstrated the ability to be consistently right—and those who have tried to time getting in and out of markets have typically been wrong at least as often as they’ve been right.
Investing always entails a combination of pain and gain—the question is when they occur.
When we experience days or weeks of volatility, the pain of investing is immediate, the gain is in the future.
If you avoid stocks, the gain in peace of mind is immediate, but the pain in lost opportunity and
retirement lifestyle is to come.
Sitting on the sidelines can be tempting and is certainly an option.
however, lets not forget that history shows that when stocks recover from a significant drop, they tend to do it very quickly—being out of the market can mean missing a rise of 25 per cent or more.
4. Volatility decreases the longer you invest!
The good news about volatility and risk is that the longer your time horizon, the less of an issue
they are. Over periods of five or ten years, the variations in returns are reduced to a fairly
For investors who need to cash in their savings in the near term, a drop in the markets can a real
However, historically, for investors with a time horizon of ten years or more, volatility decreases to the
point that it is almost a non-issue.
5. Investing based on fads and emotional reactions can be devastating.
In my 22 years in the investment industry, I have seen fads come and go and have observed how
they can devastate portfolios.
That is why I prefer to lean towards a conservative stance in my investment philosophy…
Similarly, emotional reactions can be deadly to a well-balanced portfolio.
There is a well-known saying: that “most investors fluctuate between fear and greed”.
Excessive optimism create “bubbles” in the marketplace – when the “bubbles” burst (as they always do) then investor fear and pessimism rule – until the cycle begins repeating itself…
Making decisions based on fear and greed can destroy value in a portfolio.
In my practice, I sometimes see myself acting as my clients “emotional anchor”…talking them down from emotional highs running away on them and counseling their emotional lows from becoming too low.
6. Based on history, the right managers will prove their worth – over time.
Winning money managers must have strong investment convictions and discipline, deep teams of investment professionals, consistent out performance over an extended period of time, and a track record of containing losses in downturns.
When there are dips in the markets these managers are actively looking for bargains among the stocks that have been artificially beaten down.
What is often not immediately apparent is that below the surface of a portfolio money managers are
realigning their stock positions to capitalize on opportunities.
Outlook for the period ahead:
It is almost certain that stock markets will continue to see unusually high levels of volatility in the
period ahead, and without question it will take some time for U.S. and Canadian markets and
economies to work through the excesses of the recent past, whether from the U.S. housing
bubble or the run-up in commodity prices.
However,as we look past the current environment and ahead to the mid-term, despite the ups and
downs (especially the downs), there are a number of encouraging signs:
• Central banks around the world have made it clear that they will intervene if that is what it
takes to keep markets functioning.
• The ban announced in the U.S. on short selling of financial institutions (a tactic used by some
predatory investors to put pressure on the stock prices of those companies) is likely to reduce the extreme volatility in that sector.
• To this point, it has been a financial rather than an economic crisis.
While economies in Canada, the U.S. and elsewhere have slowed, there is no sign of a steep recession on the horizon. The fact that the U.S. and Canadian central banks did not cut interest rates at their
recent meetings suggests that they are not predicting a significant downturn.
• A number of very positive forces are in place for the mid-term.
Among these are generally low inflation, the continued positive impact of technology and innovation on productivity, the overwhelmingly beneficial effects of increasing global trade, good economic and political news from most of Eastern Europe and South America, and the inexorable momentum
towards opening up markets in China, India and other parts of the developing world.
Importantly, while declining oil prices have hurt stocks in the oil patch, they are helping boost
consumer confidence and wallets.
• Good managers are finding exceptional values today. As a result of the run-up in financial
stocks, some managers with a superior track record for picking stocks largely avoided the
U.S. financial sector because of overheated valuations; in some instances, these managers
are taking advantage of depressed prices to start buying these stocks.
The American sportswriter Damon Runyon once wrote, “The race may not go to the swift nor the battle to the strong, but that’s the way to bet.”
That said, when it comes to investing, building on the lessons of history and putting managers with
strong track records to work for us is the best way to tilt the odds in our favor.
“As an active and engaged adviser, I am passionate about keeping my clients focused and invested in a way that is consistent both with long-term economic and financial history so they will achieve their life’s goals and ambitions with confidence and peace of mind”.
– Mark Huber, CFP
About The Author
Mark Huber is a is a full time certified financial planner (CFP).
Mark has distilled 22 years of insights and experience in the financial services industry into “The UnCanadian Way” series of eBooks, audios and videos.
For the latest: “How To Get Rid Of Your Mortgage – The UnCanadian Way”
2008 Mark Huber
This article may be freely distributed if this resource box stays attached.
Latest posts by Mark Huber (see all)
- How To Be A Success In 21 Days - April 26, 2013
- Mortgage Changes Affecting You – In Effect In 15 Days… - June 26, 2012
- Why I don’t recommend RESPs - July 26, 2010
- How Your RRSPs May Devastate Your Retirement Plan - July 6, 2010
- 21 Tips To Financial Freedom - July 5, 2010