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By Paul Luke
The Province
Sunday, June 18, 2006
Also published in:
Saskatoon StarPhoenix
Monday, June 26, 2006 |
Windsor Star
Monday, June 26, 2006 |
FINANCIAL PLANNING: When markets hit that bear cycle, experts say to stay focused
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “Learn to live with bear markets. People will have at least one of these in their investing lives, perhaps a lot more.”
The gloomheads say stock markets have hit a bear cycle that will last up to nine years.
Lighter-hearted observers believe the markets' recent seizures are simply corrections, or short-term price drops, that offer buying opportunities for value-conscious investors.
Most agree the turbulence will persist as markets react to rising interest rates, signs of a slowing U.S. economy and sputtering metal prices.
The Toronto Stock market's S&P/TSX composite index fell more than 900 points, or eight per cent, in a seven-session stumble that began June 5.
The TSX managed to claw back about 300 points by the end of last week but market watchers believe more losses could be on the way.
Front-line investment planners and portfolio managers say the best way for an investor to weather the storm is to diversify assets between equities, fixed-income securities and cash.
"We encourage clients to stay focused on their long-term goals and don't panic," says Jayelene Catala, a financial planner.
"When investors make decisions based on short-term market trends, they almost always lose."
Bear markets occur when a widely followed stock index falls at least 15 per cent. A correction refers to a milder, 10-per-cent decline.
Adrian Mastracci, chief investment officer with Vancouver-based KCM Wealth Management, counts 23 bear markets since 1900, based on changes in the Dow Jones index.
"Learn to live with bear markets," Mastracci says. "People will have at least one of these in their investing lives, perhaps a lot more."
Edith Smithies, a portfolio manager, says people's response to a bear or correcting market will depend on where they have the money to invest.
Their choices will be limited if they borrowed on margin accounts or have a demand loan from a bank, Smithies says.
"If you borrowed money, fear rapidly overcomes greed as markets fall," she says. "If you are a speculator, the piper is going to be paid sometime."
Even conservative investors find that unruly markets challenge their risk tolerance, experts say. That tolerance will be determined to a considerable degree by an investor's age and stage of life, they say.
A guide for coping with market turbulence
Here is a guide for coping with market turbulence for a typical 28-year-old, 48-year-old and 60-year-old investor:
At 28
Young investors may be tugged toward greater risk-taking by the enviably long period of time they have to weather stock-market turbulence.
On the other hand, they face short-term pressures to save for a house or pay off student loans, says says Jayelene Catala.
Walker Mooney, a financial adviser, suggests short-term savings facilities suit many young investors.
For those with a long-term outlook, stocks offer higher growth potential than fixed-income investments, Mooney says.
Dollar-cost averaging -- in which an investor regularly invests an affordable sum over a long period of time -- is a good way for 20-somethings to dip their toes into the market, Catala says.
Wide individual variations in risk tolerance mean some 28 year olds will be conservative investors, Catala says.
"The key at this age is to learn what kind of investor you are and what you can stand and not stand," Mastracci says.
At 48
Your earnings are close to peaking and the value of your assets has been accumulating nicely -- but what do you do when a bear starts pawing your portfolio?
Diversifying and careful investing in quality stocks are part of the answer, says Adrian Mastracci, chief investment officer with Vancouver-based KCM Wealth Management.
The quality pool consists of dividend-paying stocks and 50 to 60 big-cap stocks on the TSX.
Marc Johnson, newsletter editor, believes current market turmoil will be a relatively short-term phenomenon. Corporate profits have been growing and a decline in commodity prices will help more firms than it hurts.
Current markets offer a buying opportunity, especially for people building portfolios.
Consumer stocks are appealing, he says. This group has had the lowest price increase over the past year, rising less than one per cent, as against 34 per cent for resources. Johnson likes convenience store giant Alimentation Couche-Tard.
At 60
Investors within sight of retirement often wish to take a defensive stance, emphasizing fixed-income securities such as bonds or preferred stocks.
KCM's Adrian Mastracci, however, says 60-year-olds must avoid the mistake of becoming excessively conservative and fleeing common-share investments. They'll need enough portfolio growth to see them through two to three decades.
One rule of thumb, which will be tempered by an individual's risk tolerance, is to mirror your age in your percentage of more conservative holdings, investment specialist Sonesh Chikhlia says. In other words, a 60-year-old may want 60 per cent of a portfolio in fixed income, term deposits and cash, and 40 per cent in equities.
People living off dividend income will be little affected by a choppy market since most firms will continue making payments to shareholders, says Johnson.
However, retirees who are gradually withdrawing from the market may face a loss if they sell now.
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