investment advice

It is important to have good friends when things go bad. I remember my friend, Les, phoning us in Osgoode when our power was out, due to Ice Storm '98, for 11 days. He was a beacon in the darkness. He offered us hot coffee and warm thoughts. In these times, when economics dominate the headlines, scaring us retirees, many are scaring investors and some (Suze Orman) offer advice.

I knew I could count on Les. He is also our investment advisor. He always seems to be our font of wisdom when there is a financial consideration. His calm, cool wisdom, and educated advice have worked for me for years. He tells us not to panic. My winter during my bereavement I wrote Les long notes he kindly read. It helps to talk to others.

In order to avoid truthiness I have reproduced (with permission) the wise words of my friend Les. He always seems to have the right advice at the right time. When the markets sour he points out that we are in this long-term. We have ceased opening up our monthly statements. This will pass. It will not last forever.

Here is what Les wrote to us in his latest, most welcome epistle...

While "shaken" may be great for James Bond's martini, investor emotions don't appreciate market volatility. For many, a market downturn can be stressful. We're now in the downside of a market cycle, and decisions made now have a greater impact on your financial future than during any other time.

And while Gentlemen (and women) may instinctively Prefer Bonds more than ever, both history and logic overwhelmingly suggest that a fearful flight-to-cash or bonds would be the wrong and even risky move. Selling Low and Buying High is the exact opposite of a successful long-term strategy. (Of course, the Bonds and/or Preferred Shares you may already hold have provided some great insulation - which is why we would have made them a part of your plan.)

Investors are often tempted to extrapolate bad news and want to dash to the sidelines, not realizing that even if they turn out to be right in predicting more downside in the short-term, they then have to guess right again in choosing the time to get back in to the market to catch the next swift and sudden upsurge. Conversely, when stock (or real estate?) markets are riding high and everything looks rosy, investors are often tempted to buy more than they should, often at overly expensive prices. Market timing is something no one has ever been able to do consistently, and the consequence of missed timing is profits.

Since we are hard-wired with fight-or-flight emotions, here are 5 ways to keep emotions in check:

1) Follow this important rule: "There are two times when we forget our investment strategies. At the TOP of the market, and at the BOTTOM." Don't forget your investment strategy.

2) If checking your portfolio online when values are going down upsets you, stop checking your portfolio. When your statements arrive, consider putting them aside to open later.

3) Avoid influences that are negative. Investment programs on TV and newspaper headlines sensationalize current events, blaring the negative and mumbling through the positive, and they seldom have a calming effect. This can take your mind away from important facts.

4) If you are concerned about how your Financial Plan will be affected, speak with your Advisor who prepared the plan. The three most important words in investing are: Advice, Advice, Advice. We are your best sounding board.

5) Markets always go up and down. Volatility is the price you pay for higher returns over the long-term. Your Financial Plan is designed to take market fluctuations into consideration. Have faith in your plan.

5 ways to profit:

1) Don't sell now. This is the time when your managers are doing their best work for you and typically outperform markets. Combined with their analysts' expertise, they have far more knowledge and experience than you do, even if they inevitably make mistakes (no such thing as perfect). Let the managers manage. And to access other expertise, listen to some of the conference calls I listed in an e-mail last week.

2) Many great companies are ON SALE now. Is Coca-Cola a much different company today than a year ago? Does Petro-Canada suddenly sell products that no one wants any more? Is General Electric no longer a diversified, multi-national conglomerate? If you usually add money to your investments early in the New Year, consider adding some of that money now instead of waiting for later when markets might be higher. This could help increase your long-term returns.

3) If you make monthly contributions to your investments, this is a time that allows you to buy new investments at very attractive prices. This will help boost your returns in the long run. Consider increasing your monthly contributions for even greater impact.

4) If you take regular income from your portfolio above and beyond Dividends and Interest, sell stable investments such as Bonds when markets are down. Later, when stock markets have rebounded, you can re-balance accordingly.

5) Share these tips with your spouse. Together, you'll make the most profitable decisions.

There are always reasons not to invest - in fact, I attach 48 of them, one for each year starting in 1960! Yet patient investors have made excellent returns over this time.

Extreme market volatility looks to continue in the short-term, not only in the U.S. but around the world. The credit freeze-up has put ice in the financial pipes and led to extreme and even absurd market behaviour, which can't last. The mortgage asset purchase program finalized late last week is a key step in thawing the pipes and, ultimately, in regaining market confidence.

As I mentioned in my e-mail last week, Bear markets are a normal fact of life and are followed by great gains. Following the seven major Bear markets from 1960 onwards, stock markets on average gained 29% within one year and 45% (cumulative) two years later (U.S. data, chart enclosed). Do you really want to get out now?

I certainly do appreciate that 2008 has proven to be a very difficult and frustrating year. It's easy to forget that the last five years produced great gains! Or that the period immediately before that was difficult, too. Like other Bear markets, this one will end, and stocks will move sharply upward again.

Regards,
Les Kom, FMA
Financial Planner and Investment Advisor
www.leskom.ca

(Reprinted by permission.)