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Investors rewarded for clinging on to a wild ride

The past three years of market returns have taken most investors on a wild ride.

The past three years of market returns have taken most investors on a wild ride. First we had a recession in 2008 that left individuals with large losses on the year. Then 2009 provided investors with the strongest rebound in 50 years, which made back a lot of what investors had lost the year before.

2010, was another great year, with the major North American indices growing anywhere from 10 to 15 per cent. What a tremendous ride, and in my opinion, the roller coaster ride of the last three years has caused many investors to re-think how they invest. Gone are the days of holding an investment and having it rise year after year without having to change it. Even though we have seen a tremendous run up since the market bottom, investors are still questioning if the idea of investing in the stock market through different investment vehicles is worth it, or are they better off putting their money to work somewhere else, like real estate or simply leaving it in the bank. Many individuals today would say investing is like gambling, it’s all luck and they’re not interested. That couldn’t be further from the truth.

Investing is not gambling. It is a means by which people can get from
where they are today to where they want to be in the future. Most people choose to invest to attain a goal, whether it is investing for retirement, their children’s education or simply investing to keep up with the rising costs of living. Investing is using the vehicles necessary to get you from point “A” to point “B” on your economic road map. The numbers usually decide what risks you need to take, how long you will have to invest for to achieve your goals and which investment you should choose to help you succeed.

Of course, there are other places an individual can deposit their money, such as real estate. Real estate can and should be a part of a diversified portfolio. However, real estate at times can be more illiquid than stocks or mutual funds. If you need to access money, and thus need to sell some real estate, the process is a lot longer and more difficult at times to accomplish.

Whereas if you own mutual funds or shares of large companies that trade frequently on an exchange, there should be no problem to get out. Thus, real estate investments can have their drawbacks like anything else. If an investor can afford to do both real estate and other types of investing such as stocks and bonds, that is the ideal situation.

If an investor has a long time horizon before they require the money they are investing, then this individual should not be worried about the day to day ups and downs of the market. In fact, an investor with a long term approach wants the market to remain low for an extended period while they accumulate assets at low prices. Therefore, if you are a young investor, or an investor with many years to reach your goals, you should continue to add to your investments regardless of market sentiment or movement, as long you are investing in good quality products.

Investors that have a shorter time horizon must monitor their situation a little more closely to see if their goals can can be attained in that period. These investors have less time to make up any shortfalls. A general rule is the older an investor, the more fixed income (e.g. bonds, debentures) they should have in their portfolio.

Sometimes investors cannot attain their goals by purchasing just bonds. If the rates of return on bonds are not high enough to achieve one's target, then these investors must purchase equities (stock or mutual funds) to hopefully obtain the extra growth to reach their objective. This is where an investment advisor can help design a portfolio to best suit an investor’s needs.

If an investor is going to own equities (e.g. stocks or mutual funds) as part of their diversified portfolio, they should own best of breed equities. This means owning the best stocks or funds in that class or sector. When you purchase these investments, set your targets as to when you will sell and then stick to that number. You don’t have to be an active trader to make money in the stock market, but you must be disciplined. If your investment should fall in value but the fundamentals of that investment are still intact don’t panic, buy more, especially if you have a long term time horizon. Panic selling is the worst thing an investor can do. Unfortunately, we have seen plenty of that in the last few years.

If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.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.

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