To be a successful investor, you should take a long-term perspective. Yet that’s not always easy, because most of the investment-related news is short-term in nature — one day you hear that the market is up, and the next day you read a negative report on the economy. What can you do to stay focused on the “big picture”?
Here are a few suggestions:
Know your investment history. When the stock market declines sharply, everyone knows about it. But when the market gradually moves up, it seems much less newsworthy — perhaps because it’s so common. In fact, from 1919 through 2009, the S&P/TSX Composite Index (TSX) has shown positive returns 64% of the time over one-year periods, 84% of the time over five-year periods and 90% of the time over 10-year periods. (The TSX is an unmanaged index that cannot be invested into directly.) And you can find similar returns in the U.S. and other major stock markets. Of course, as you’ve no doubt heard, “past performance is not a guarantee of future results,” and this is certainly true. But as you invest for your future, keep in mind that the financial markets have historically trended one way — up.
Even if you know that investment history is on your side, your emotions might lead you to the “sidelines” during the midst of a particularly harsh bear market, such as the one we saw in 2008 and early 2009. But if you had pulled out of the market during that time, you would have missed out on the big rally that began in March 2009. It’s not always easy to ignore short-term price drops — especially when that “short term” lasts more than a year — but if you can develop the discipline to stay invested through good times and bad, you may well be rewarded. Keep in mind that the biggest gains are often achieved at the beginning of a market rally, so if you’re always invested, you won’t miss out on these opportunities.
Develop a comprehensive strategy
It’s important to try to build your savings by contributing to accounts such as your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). Yet you just shouldn’t simply make these contributions and forget about them. Instead, you have to determine how your RRSP, TFSA and other investment accounts fit into your overall portfolio — your big picture. For example, do the individual investments — such as stocks, bonds and mutual funds — inside your RRSP and TFSA give you adequate diversification? While diversification, by itself, cannot guarantee a profit or protect against loss, it can help reduce the effects of volatility on your portfolio. You also need to determine if your investment accounts will provide you with the right mix of growth and income opportunities, given your individual risk tolerance and time horizon. To take all these variables into account in developing your comprehensive strategy, you may want to work with a professional financial advisor — someone with the experience and expertise to help you navigate through the investment world, which can be challenging.
In almost all areas of our lives, we can get so caught up in day-to-day activities that we overlook the larger scenario. Don’t let that happen to you when it comes to investing. By keeping your eyes on the big picture, you may someday achieve big results.
Member – Canadian Investor Protection Fund
Jodi Nastor, CFP
390 McNabb Street Unit 2