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| Adrian Mastracci, president of KCM Wealth
Management, says "Clearly, asset mix decisions ought to
remain the focus of every portfolio, especially for those investors
overweight in stocks." |
For Immediate Release
Vancouver, BC (July 4, 2002): There was a song
made famous by the Rolling Stones about “Can’t get no
satisfaction”. Well, the stock markets have made famous their
own song which I call “Can’t get no traction”.
Here are some of the familiar lyrics. Positive economic signs are
surfacing at home and elsewhere. Many signposts point to a global
recovery, albeit a slow one. But, as we have seen repeatedly, very
little seems to stick.
Market rallies are short lived. The bear refuses to go away. Investors
are full of fears. Hold on, earnings season is just around the corner
again. More confessions are coming.
Stocks are under siege from all directions. Not a day goes by that
more questions arise about the direction of the investment world.
Slippery slopes seem to sprout all around us.
So, what’s an exasperated investor to do?
I maintain that part of the investing experience includes factoring
in an unexpected or prolonged event that significantly alters expectations.
No doubt, we’re in the midst of one now.
This reinforces the time-honoured cornerstone of diversification.
History reminds us that a portfolio will always have some components
going in opposite directions from expectations.
It’s frustrating. The unprecedented uncertainty manifests
itself in persisting volatility in all major markets. Simply said,
markets just don't like uncertainty.
Of course, we’ve dealt with lack of traction in the past.
I recall the investor reaction in October 1987 when the markets
seemed to be falling straight off the cliff.
Many investors said that they were not going to invest another
dime in stocks. Perhaps, that reaction was slightly emotional. After
all, the Dow Jones Industrials did fall 22.7% in one day!
Lest we forget, successful investing is not about having easy answers.
Rather, it’s a game of probability. We aim to be right more
often than wrong.
With that in mind, three insights about steering today’s
investment climate of no traction:
1. A panic button off limits
Keep that finger off the panic button. Examine the long-term game
plan first. The one containing all the policies to reach or maintain
financial security. Above all, have confidence in the blueprint.
This removes the tendency to make emotional investment decisions.
2. Asset mix is crucial
Pay special attention to asset mix decisions pertaining to cash,
bonds and equities. They have the greatest impact on portfolio returns.
Studies show that asset mix decisions explain, on average, 94%
of the contribution to total return. By contrast, stock selections
explain 4%, while
market timings explain 2%.
3. Adopt a loss strategy
Yes, it's never too late. Not even now! Adopt an investment loss
strategy and make use of it. Say the personal threshold of pain
is a 30% loss from the buy price. Sell the security and move onto
something that has potential when the investment reaches the loss
threshold. It would have made a big difference on the Nortel, Enron,
Lucent and WorldCom purchases.
Investment patience may continue under stress in the months ahead.
Clearly, asset mix decisions ought to remain the focus of every
portfolio, especially for those overweight in stocks.
A portfolio should stay invested according to appropriate policies
for each situation. That means staying diversified, being mindful
of the risks and, of course, with a suitable asset mix.
Patience is required. Traction in the markets will return one day.
None too soon!
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