The day to day fluctuations in the North American stock markets over the past eight months have been very difficult for many investors to follow. On one hand, investors have seen how the economy of the most powerful country in the world can fall so rapidly and with such force that it affects the lives of individuals around the world. On the other hand, investors continue to see signs of resiliency and stability exhibited by investors in Canada and the United States. Will these individuals remain positive?
Investors have witnessed an approximate 50 per cent decline in North American stock market valuations followed by the recent 35 per cent rebound in those same indices. These large discrepancies in market valuations have generated confusion and differences of opinion amongst even the most notable analysts. Therefore with all this uncertainty and confusion, what mistakes should investors be mindful of avoiding?
The following is my list of top five investment ideas or strategies that individuals misunderstand or get wrong.
- Trying to time the market: Most investors know that it is very difficult to time the market — knowing when an investment is at its low to buy and when it gets to its high to sell — yet many continue to try and do it. The current recession has pushed people to sell out of the market when they felt it was falling, only to try and buy back in to take part in the upside rebound. Some investors get lucky and are able to accomplish this most difficult feat. However, most result to selling out near the bottom and do not re-enter the market until after it rises significantly, missing the first 30 to 40 per cent of the rebound. “Buy high and sell low” is the opposite of what investors should be doing.
- GIC’s can grow wealth over time: Over the past 25 years GIC’s have not grown wealth for investors after you factor in inflation and taxes. Statistics show that if an investor were to invest $10,000 into a GIC in 1982, by 2007 that GIC would have increased in value to $10,500 when you factor in taxes and inflation of someone in the highest tax bracket. If you compare this to the S&P 500, that same $10,000 would have grown to approximately $49,000 by 2007. Some investors believe that they would have fared better investing in GIC’s over equities these last two years. While this is true, you would have also fared better if you left your money under your mattress as well. You cannot measure performance of asset classes over a short period of time like one or two years. It is a fact that stocks outperform all other asset classes over time. Whether or not an investor should own a GIC, a mutual fund or a stock depends on risk levels and time horizon of the individual investor.
- Gold is in high demand and thus all portfolios should have an abundance of gold in it: Gold is a very difficult investment to buy because the price does not fluctuate based on its own merits of supply and demand as other commodities do. Instead, the price fluctuates based on the U.S. dollar, inflation and world safety. Gold is a hard asset and an alternative for investors to flock to when there is chaos in the world. Gold should be used as a hedge against a falling U.S. dollar. Since gold is priced in U. S. dollars, as the currency drops in value, more can be purchased, therefore driving up its price. Most money managers use gold as a hedge and an investment when times are tough.
- Purchase investments seen on television or in the newspaper: Investors have to be very careful buying investments recommended in the media. An investor should understand why it is being recommended before they do anything. Does the person making the recommendation already own this investment, and if so, when was it purchased? Many times, the person making the recommendation already owns that investment and they purchased it months before they recommend it on television. Thus an investor could be buying something that is at a much higher price than when the person recommending the investment bought it at, thus inflating its price further.
- Buying the hot investment from last week, month or year: It is often the case that if you purchase something that was last year’s hot investment, it may very well be this year’s flop. Investments tend to move in cycles. When you catch an investment on an upward trend there is a lot of money to be made. However, at some point an investor should jump off as the investment is sure to reverse its course. Therefore if an investor was to buy something that was red hot already, that investment could be approaching its downward trend closer than if the investor purchased something that was out of favour but of good quality waiting for the quality to be realized by the market.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
