Almost everyone who invests in a market fund knows the markets ( and therefore their fund value) will go up and down. But it seems that almost everyone, when the market goes down, is gripped with the fear of loss. Their reaction is to ‘get out’ even though they know the market will go back up. Getting out is a certain way of locking in your losses. Getting out does not protect your money. The only way to protect your money is to wait for the value to return. I’ve never had anyone tell me “I have gained so much money I should get out now.” They only want out after they have had a loss.
Most, but not all, market downturns is simply the method the market the market has to correct over-priced stocks, to bring their price in line with their value. This is normal and happens all the time, sometimes in a very dramatic manner, but usually it is an ongoing process that alarms no one.
People who exit the market when their funds are low will always lose money. The market has always come back, some time very quickly. Even one day can produce dramatic gains. A recent survey I saw showed that if you were to miss the best day of a market gain you could lose 20-30% of the value of your funds. Just as losses can happen very quickly, in a day or in a very few days, so the market gains can happen in just a few days of the year. The only way to catch these, is to be there before they happen.
People like to chase winners and drop losers. History shows this is the perfect way to lose money because it means you are judging the winners and losers based on yesterday’s data. The fact is that by the time you see that data, it is too late to make a decision on what you should have done the day before yesterday.
Sometimes the market jitters can be unnerving. If this is more than you can handle, then you have to be satisfied with the returns on guaranteed funds. But the switch from the market funds to guaranteed funds should be made when the market has produced a satisfactory return for you. It should not be made when the market has just dipped.
The 7 Whines of Christmas
7. I always GAIN weight at Christmas.
6. The WINE gives me a headache.
5. Eggnog is SO not good for you.
4. There’s always TOO much turkey left over.
3. PEOPLE just drop in unexpectedly.
2. Why do they keep sending a Christmas CARD?
1. Do I have to get up THIS early?
Managed funds make money when the value of the stocks they hold in the fund increase in value. Just because there is a recession does not mean that all stocks will decline in value. In fact, a company could improve it’s bottom line during a recession and it’s stock value could increase. If a fund holds stocks in companies which manage the slowed economy well, then the fund could increase in value. This is just as true as saying that during an economic boom a company’s stock might decline in value because of bad management, and funds which hold this one in their portfolio would obviously decline as well.
This is the reason some funds limit both the amount they hold in any one company, and the amount they hold in any market segment. It is one of the great values to having a Seg Fund as an investment versus personally owning stocks. The Fund allows you to spread the risk over a larger number of segments and stocks, as well as providing you with professional selection.
With all the talk these days of a possible/pending/likely/but maybe not recession, it seems to me that news reports do a poor job in their headlines when they report economic news. While the words might be technically true, the real story is usually not told either in the headline or in the body of the story.
When I read a headline that says “Bank Profit Falls 40%” I know that does not mean the bank is losing money. They are still making a profit, just less than last year (when they increased their profit by 30%). The reality is their profit may have slipped only 10 % over a 2 year period. Hardly cause for alarm to anyone but the CEO who’s bonus might be cut by a few million dollars.
I was at a meeting recently where an overview was given of how a Seg Fund company invests their clients money. You always learn at these meetings some tidbits of information which are revealing of how the funds work.
For example. they had invested in two stocks in 2006 which they sold in 2007 after they had increased in value 100%. Unfortunately they continued to increase after the company sold them. The point they were making is that buying and selling has to be disciplined, and they sold when their established procedures said it was time to sell. The subsequent increase in the stocks value came as a result of unexpected events (such as a natural disaster) which they could not predict.
They also explained that while their international funds had increased in value, the Canadian dollar has also increased in value. International funds are frequently held in US funds, so the increase in value of the stock portfolio was offset by the decrease in value of the US dollar.
For obvious reasons I am not saying which company meeting I was at, and which stocks they had bought and sold, but as an old shopkeeper acquaintance of mine always said, “Trust Me.”
Accept that the amount of insurance you carry should be based on the value of what’s being insured. It’s interesting to see how people judge value. Value is in the eye of the beholder. A photo, which has no monetary value and is irreplaceable, might be priceless. A large building which is being used only because it exists, has an obvious physical value, but might be worthless to it’s owner, it’s loss of no significance. The loss could even be viewed a beneficiary because it was not valued and now has been removed.
When you enter into an insurance contract, value becomes something tangible. The contract will state the basis of valuation, and there are terms such as assessed value, cash value, actual cash value, depreciated value, replacement cost, agreed value, etc. The term used will vary with the type of contract. Life insurance has an agreed upon value. Car insurance has (usually) cash value. Property insurance can be Replacement value, but it can also be assessed value or actual cash value.
People always overvalue an object after it is lost, and undervalue it when purchasing insurance. The reasons for doing this are obvious. What’s interesting is how value can be made to mean anything you want it to be.
All travel plans contain exclusions for pre-existing conditions. Cautious by nature, insurance companies tend to sweep exclsuions from a policy even if they are not justified. It’s quicker to sweep than investigate. A recent case we had involved a client who had all cardio-vascular conditions excluded from their travel insurance even though they had their doctor submit a medical report. We advised the client to have their doctor submit a follow-up letter to clarify their condition in the belief there was a mis-understanding about the patients health status. As a result the company reversed it position and removed the exclusions. The client is happy. We are happy we were able to help. And the company is happy that, with the correct information, they were able to properly assess the risk. It was a win-win-win!
Insurance companies rate based on known risks. Unknown risks are a problem. The more information they have, the better able they are to rate a risk, and if possible, include the risk in their coverage. In the absence of knowledge, they will always sweep the risk away.
Hopefully there is something of interest to read here, and if it sparks some thinking or a question, then hopefully you will follow the link or ask us to find one for you.