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The Globe And Mail
The Educated Investor Supplement
Tuesday, October 17, 2006
Many investors, looking at yo-yoing stock prices in sectors such as oil and gas, are concerned that markets are entering a period of greater volatility, requiring a renewed focus on capital protection. But is that really true?
Adrian Mastracci, portfolio manager at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "No matter how much due diligence you've done or how much you believed in a particular stock, don’t be afraid to admit you made a mistake. You’ve got to take the medicine and get on with other things."
According to many Canadian investment professionals, the markets are always volatile, so some degree of capital protection always makes sense.
When prices are going up. boosting investors’ returns, people don’t tend to see that as "volatility”— they simply see it as a good market, points out Richard Howson, executive vice president and chief investment officer at Saxon Financial Inc., a Toronto-based investment management firm. “If the volatility is on the upside, everybody’s happy, and that’s an important reason why the S&P/TSX composite index has done so well over the past couple of years,” he points out.
Howson’s colleague Allan Smith, president and CEO of Saxon Financial Inc., emphasizes that any number of factors — ranging from unemployment figures to geopolitical events — can influence the markets and investors, both positively and negatively. “Interest rates and the general perception of the state of the economy have a lot to do with the perception of volatility at any given time,” says Mr. Smith.
When markets are fluctuating heavily, investors’ emotions often come into play. Mr. Smith adds, using the tech bubble of a few years ago as an example. Overly optimistic views of the value of these equities spurred investors to plunk down their money in the hopes of quick riches. When those didn’t immediately materialize, values plummeted. However, Mr. Smith points out, the volatility in some cases had little relation to actual company value: “The financial condition of tech companies may have remained constant from one month to the next."
He adds, “As human beings, we typically take what’s happened in the recent past and overstate its likelihood of happening in the future.” What investors should do instead, he says, is focus on the long-term past and the long-term future.
Adrian Mastracci, portfolio manager with Vancouver-based KCM Wealth Management, agrees that a focus on the long term is crucial. In fact, it is the first of five strategies he advocates for managing risk while maximizing returns.
The second is to diversify your investments across a broad range of asset classes, sectors and geographical regions. “A diversified portfolio will save the day most of the time,” says Mr. Mastracci.
Third, he urges people who choose to invest directly in stocks to cut their losses early by jettisoning poor performers as soon as a drop becomes obvious. In particular, avoid becoming emotionally attached to a particular stock. No matter how much due diligence you've done or how much you believed in a particular stock, don’t be afraid to admit you made a mistake. As Mr. Mastracci says, "You’ve got to take the medicine and get on with other things."
Fourth, he says, take your time when investing. Don’t feel you have to invest all your money at once. Take perhaps a year or two to watch the markets and spread your risks around.
Finally, seek the advice of an independent advisor, who is trained to analyze markets and less likely to be swayed by short-term trends or emotional attachments to a particular investment.
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