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Investment Fire Drill Part 2

We have talked about how fire drills are the key to responding appropriately when a fire emergency happens.  By practicing the responses multiple times, we are able to condition our responses so that they are automatic.  Plus, we have a sense of how we might feel during the emergency. 

We talked about how we can help prepare ourselves for market volatility and market drops by looking at history.  By doing this we can understand what happened in the markets during the correction, and how markets ended up over time. We can also put the correction in perspective to market performance over our own personal relevant time frames.  Even more important, we may gain an understanding on what our response should be to allow us to benefit from the market volatility.

In our last blog we talked about the 5 strategies outlined by CI Investments to help you respond to difficult markets.  It is worthwhile to review them again.

  1. Take a long-term view,
  2. Be diversified,
  3. Resist the temptation of market timing,
  4. Take advantage of market volatility,
  5. Work with an advisor.

 Market weakness associated with a recession have happened regularly over history.  If you review the “Where do we go from here?” charts from Franklin Templeton, they illustrate how far the recent market pullbacks dropped, and how long they lasted.  This is compared against the length of the strong markets that followed and how far those market recoveries advanced.  Markets are overwhelmingly positive over time and equity market investments are required to build wealth, responsibly, over time.

We can anticipate market weakness, but it is impossible to time a market pullback correctly.  Even if you did get out at the right time, then you would need to accurately time the beginning of the recovery as well.  History shows that this is impossible.

 We think the best approach is to make sure that your short-term goals and income requirements are met with investments that provide stability in market volatility, or have no market volatility at all.  Those are goals that are 3 – 5 years timeframe.  They could include retirement income, buying a car, or paying for education. Your longer-term goals will be met by establishing a diversified asset allocation strategy that matches your risk profile and time horizon.  This strategy provides you with the opportunity to earn the long-term returns needed to reach your goals.

Late in an economic growth cycle (like we are currently in), we may tilt a portfolio slightly to provide some additional capital protection in order to provide some liquidity to rebalance during the market pullback.  This provides you with the opportunity to add growth at a time when there is much less market risk.

Our experience and research suggest that small moves away from your target asset allocation is all that is required to provide a boost to your longer-term portfolio performance.

The article Five Timeless Principles for Investing Success from Manulife Investments helps provide you with a reminder of the key investing principles to help you invest successfully.