Off the sidelines

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Historically one of the worst months of the year, September turned out to be a strong month for equity markets, continuing a rally that has been underway since the beginning of July. It’s a shame so many investors remain parked in cash.

Watching a rally from the sidelines can be a pretty painful experience – right up there with participating in a decline, says Don Reed, president and CEO of Franklin Templeton.

“It makes people nervous to not have money in a market that is rising,” he says. “People have gone to bonds and savings accounts, but when that money starts to enter the market feverishly, and it will happen, then investors want in.”

A recent Angus Reid survey found 70% of Canadians admit they get anxious or confused by market buzz and let their emotions affect investment decisions.

As investment professionals, advisors need to initiate a kind of ‘emotional rescue’ and remind investors that it is never a good idea to turn your back on the market.

“Emotion is an investor’s biggest enemy,” says Trung Oan, a senior financial advisor with TD Waterhouse in Vancouver.

Jumping out of the market during down periods destroys long-term returns he tells clients. “You don’t want to buy things after the sale is over. By the time things look better you’ll be paying 20% or 30% more than what you would have paid two years ago.”

Oan believes that even the most skittish investor needs a bare minimum of 15% of their portfolio in equities.

“Someone who is 10 to 15 years away from retirement and has opted out of the market, I tell them they are not going to able to achieve their retirement goals on savings alone,” he says.

Even in times of wide gyrations in the overall market, withdrawing from the stocks altogether is probably a bad idea. Investing in equities doesn’t require a high-risk approach, as investors can opt for relatively conservative mutual fund mandates.

“Income oriented funds are very practical,” says Oan. “They have a nice balance of fixed income and dividend baring stocks. For example companies with healthy balance sheets and strong cash flows can pay a dividend yield of 2.5% to 3%, with capital appreciation – compare that to a one year GIC doesn’t even give you 2% which barely keeps up with inflation.”

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Opting out of the market and expecting to save enough for retirement without the growth of equity market exposure could leave retirees living on a very tight budget, as their asset base might be too low to sustain their desired lifestyle.

“If a client is going to achieve their retirement goals just on savings alone they are going to have to live a really modest lifestyle during their working years,” he says. “They are going to have to make a lot of sacrifices – so it really is important to have a growth component in their portfolio.”

Franklin Templeton’s Don Reed agrees.

“If you are in a balanced fund it allows you to participate in any upside movement in the market,” he says. “But the flip side is more protection with fixed income fixed portion of a balanced fund on the downside.”

Reed says he “fervently, totally” believes in dollar cost averaging for clients, which further helps to mitigate investment risk. “Its how professional money managers work,” he says.

“I’ve been in this business a long time and I have only been able to catch the bottom of the market maybe five times – and I am lying about four of those times,” Reed jokes.

“Yes, dollar cost averaging makes a lot of sense,” says Oan, who coaches gun-shy clients on how to maintain a successful portfolio. “Buy in a little every month. They can dip their toes in the water and avoid buying at the top.”

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• Brenda Craig is a freelance financial journalist.

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