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DOWN Markets can offer incredible opportunities

Famous investor Warren Buffett has stated that, because markets tend to be manic depressive, they will occasionally offer you a ridiculous buying opportunity. In other words, in bad times you may be able to buy some good companies for less than they are really worth.

This is sound advice, but only for investors who can hold these investments beyond periods of market irrationality - which could sometimes take years. If your time frame is shorter than five years, you should stay with safer investments to insulate yourself from market forces.

What are your time lines?

Markets never seem to recover at the same rate that they drop, and many investors think now is the time to go into cash. We have always advised that your portfolio should be appropriate for your objectives. It has to be built to reflect the fact that you will eventually be withdrawing your money. If you will not be taking money out for a long time, you may want to acquire more equities, if not, more bonds.

Many people want to re-allocate their portfolios during rough periods in the market. They are afraid of losing capital or, more irrationally, think they will lose everything. If you are new to investing, you will gain a better understanding of your true risk nature during these periods. If the sudden volatility in the markets makes you uncomfortable, your portfolio may not be meeting your risk objectives and should be changed. However, do not become conservative in bad times (moving out of investments and simply convert to cash) and suddenly aggressive when markets are hot (buying back in near the top). As professional investors, we know that the markets will recover - it is just a matter of when. However, you have to resist the tendency to become more defensive at the wrong time - when the markets are already down.

Don't panic

At the bottom of the markets, everyone wants to move out, place their investments into something secure, and wait. We hear that some investors just want to "wait and see" what happens, "if" things get better, for 6 months, 12 months - then they'll move back into the markets. This kind of thinking is counter to the whole premise of investing - buy low, sell high.

There will always be volatility in the stock markets; stocks are dependent on the psychology of the market participants in the short term. However, in the long haul, stock markets tend to rise at the rate of productivity and profit growth, which produces a healthy enough return over time. But it is inconsistent. To be a successful investor, you need to have faith in the long-term prospects for the stock markets, provided you stay diversified. Investors have to look at a 5 to 7 year holding period to take advantage of the market's volatility and make money.

Look at the long-term picture

Stock markets tend to fall much faster than they rise; this is why we see such panics when they come down, because it is so rapid. However, they climb for longer than they drop, and they rise more often. This is why the charts of the stock markets are always pointing upwards. People tend to forget this.

To be a smart investor, you must have a contrarian nature. If you remember that after the down market in 2002, people did not want to buy into the stock market. In 1999, everyone wanted to buy stocks, because of how well the markets had been doing for a number of years. Contrarians were warning not to buy in 1999, but to buy in 2002, the exact opposite of what the public and media were suggesting.

What are contrarians saying now? Well, all we can tell you is that Warren Buffett is buying, and if things are so dismal and negative, why would he be doing that? When the media and public are negative it is the best time to invest, but the hardest to do emotionally.

If you would like to take the opportunity to review your portfolio objectives, please contact our office for an appointment.

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