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Vancouver, B.C. (December
14, 2000): On the approach to the year-end
2000, we are experiencing unprecedented levels
of uncertainty in several global economies. All
the major players are affected (US, Japan, Europe),
and there is expectation for continued global
economic slowdowns in the headlines. In short,
we have unsettling times.
I refer to this global economic
slowdown as the "perfect storm" because it has
a silver lining for smart investors. Right now,
investors have the opportunity to study the economic
predictions, assess how they could be personally
affected and take appropriate action to profit
from the market turmoil.
I have designed a three-part exercise,
each containing five points. First, a review of
how well personal investment strategy performed
in the year 2000. Second, a look at the economic
expectations for 2001 and beyond. Third, and most
important, how to profit with this insight and
knowledge.
Of greatest importance to investors
is to have the long-term game plan in place, one
that is ready to make moves as the perfect storm
opportunities appear in the investment neighbourhood.
My clients and I my go through this three-part
exercise when we first begin and at least once
a year thereafter.
Part One - The Year 2000 in Review
How did investors fare in the year 2000 investment
climate? Here is the analysis:
- The first debate is how to evaluate the year
2000 results. Is it a comparison to the best
mutual funds, the worst mutual funds, the latest
Canada Saving Bond rate, the TSE 300 or some
other statistic? The world is full of benchmarks,
but how do they relate to the goals investors
want to accomplish?
- Has each investor calculated the annual rate
of return required to achieve their financial
destination? This is the only relevant "personal"
benchmark the investor will ever need to measure
progress. Is it 6%, 10%, 15%, 20%, or has the
milestone been reached? I calculate this for
all my clients.
- Is the written long-term game plan in place?
If not, would that investor build a house without
a blueprint?
- Are the investment selections from the school
of "Stuff Happens"? That is, no one can explain
why they became part of the portfolio.
- Were they preoccupied with stock selections,
market timing strategies and chasing yesterday's
winners? Here is my hot tip - these strategies
do not work!
This objective assessment will help
decide if investment policies are on course to
realizing personal goals, such as financial independence
and retirement. As an example, if the minimum
investment return is 10% and only 5% is achieved,
the review of the asset allocation decisions (not
the stock selections) should demonstrate the tweaking
required to stay on course.
Part Two - Expectations for 2001
and Beyond
The second part for the investor is to become
informed about economic expectations. I accomplish
this on behalf of my clients by monitoring about
twenty global economic factors that influence
the markets.
Five of the global early warning
signals tracked on my radar screen for my clients
include:
- Growth forecasts for the world's largest economies
(US, Japan, Europe),
- Frequency of weaker corporate earnings and
earnings warnings,
- The "r" word (recession) making its way back
into business headlines,
- Direction of rising inflationary pressures,
and
- Interest rate jitters and uncertainties.
These indicators will contribute
in varying degrees to market volatility, sometimes
at hurricane force levels. Investors ought to
stand back from the forest, look at the big picture
and formulate their perspective.
The investors’ goal is to determine
how the economic indicators could affect their
game plan and how to profit from the investment
opportunities that appear during the "perfect
storm".
Part Three - The Important Question:
How To Profit With This Insight and Knowledge?
Now for the best part of this exercise. Here is
how I interpret the answers with my clients:
- Conventional wisdom says that upon arrival
of the "perfect storm" sell what one can, or
at least hold on to the nest egg. One then runs
to the sidelines and takes cover until the storm
loses steam. Finally, re-entry in the investment
arena occurs when the good times return. My
experience shows that this is a sure-fire losing
strategy. How many times have investors been
down this path?
- Conversely, unconventional wisdom welcomes
the perfect storm as an excellent opportunity
for investors to review their long-term game
plan, be patient, brave the elements and take
advantage of the buying opportunities. I am
in this camp and experience shows that it yields
rewards.
- There will be a "sale" tag on many investments
as the perfect storm unfolds. Investors will
be able to buy them at substantial discounts.
However, the sale can often be short lived and
with little notice.
- No one has the insight to consistently pick
market bottoms, not even professionals. Investors
with foresight who venture into turbulence and
buy on weakness are rewarded with long-term
profits.
- I prefer to buy fundamentally sound investments
when everyone is dumping them and running for
cover. If the out of favour investment makes
sense, it is an excellent buy, even if the price
falls further. This is when dollar cost averaging
makes sense.
It takes patience and bravery to
travel the unconventional road, but the potential
rewards are worth it. My recommendation to investors,
as we bid farewell to volatility a la year 2000,
is to complete their objective assessment. Engage
professional help if required, conduct this three-part
exercise, and formulate expectations as they relate
to personal goals. Lastly, investors should ensure
that their long-term game plan is tuned and ready
to take part in the investment "sale" as it happens.
There is a silver lining in the
perfect storm, and investors can profit from it.
Keep a firm grip on the wheel and focus both eyes
on the horizon, no matter how big the waves get.
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