Setback a boon to your strategic investment plan

Stock markets have plunged around the world. But we see no 2008- and 2009-style market meltdown on the way. As a result, make the most of this market setback. Continue to implement your long term strategic investment plan to build your portfolio by buying high-quality, dividend-paying stocks at lower prices.

Stock markets have tumbled worldwide. This started in earnest on August 11, when China devalued its currency, the Yuan. Chinese stocks continued to plunge. Between August 11 and August 24, the total value of global stocks fell by $5 trillion, according to The Globe and Mail. This suits your strategic investment objectives to buy high-quality, dividend-paying stocks on the cheap.

You might worry that this is just the beginning of a 2008- and 2009-style market meltdown. We see two big differences between then and now.

First, the U.S. economy is growing. By contrast, it entered a deep recession in January, 2007. The U.S. is by far our largest trading partner. So growth south of the border is positive for Canada. This greatly outweighs China’s slowdown to growth of ‘only’ seven per cent or so. China’s real impact is in knocking down commodity prices.

Second, in 2008 and 2009, many companies carried too much debt and faced a cash crunch. Today, on the other hand, many major companies are cash rich. Far fewer companies are deeply in debt.

Take the strategic investment advice of Charles Ellis

It’s best to buy stocks when they’re cheap. Mr. Charles Ellis points this out in his book Winning the Loser’s Game. This book is required reading for CFAs (or Chartered Financial Analysts). For nearly three decades, Mr. Ellis was managing director of Greenwich Associates. It provides strategy consulting to professional financial service firms. Mr. Ellis also taught investment courses at both Harvard Business School and Yale School of Management.

Mr. Ellis writes: “The lower the price of the shares when you buy, the more shares you will get for every $1,000 you invest and the greater the amount of dollars you will receive in dividends on your investment. Therefore, if you are a saver and a buyer of shares—as most investors are and will continue to be for many years—your real long-term interest is, curiously, to have stock prices go down quite a lot and stay there so that you can accumulate more shares at lower prices and therefore receive more dividends with the savings you invest.” Mr. Ellis sees market setbacks as positive for investors.

Buyers come out ahead of sellers

In short, the drop in stock prices worldwide is no disaster for investors whose strategic investment objectives include building their portfolios. Instead, it gives you a great opportunity to pick up stocks at attractively-low prices. Only investors permanently withdrawing from the market stand to lose. That’s why it’s best to withdraw gradually and in an orderly manner so as to avoid or reduce losses.

Selling locks in losses

An elderly friend of ours was unnerved by the stock market meltdown of 2008 and 2009. Against our advice, she sold much of her unregistered stock portfolio (outside her Registered Retirement Income Fund). “I’m going to wait out this crazy market and then get back in.” The trouble is, she missed the market bottom. It only became evident with the benefit of hindsight.

Our friend did have a strategic investment objective to justify her selling. She is retired and she wanted to reduce her exposure to the unpredictable vagaries of the stock market.

But, providing that your long term investment strategy is aimed at building your portfolio, you should avoid trying to time the market. As Bernard Baruch quipped, “Buying at the bottom and selling at the top can’t be done—except by liars.” Selling in this market setback is likely to lock in losses.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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