Focus on the right mix for you

Last week we talked about price to earnings (PE) ratios and what they can tell you about the "mood" -- optimism or pessimism -- of the stock market as a whole.

Thank you to those readers who turned their homework in on time. We asked you to compare the current PE ratio to the long-term average PE ratio and say if now is a good time to invest.

Most folks who examined the Toronto exchange (S&P TSX composite index) suggested that yes, now is a good time to invest. The current PE is about 15.6, compared to a 10-year average of 18.5. That makes the market a little cheaper than recent averages.

Several readers, including one we will call Jack, commented it was "not a slam dunk" and pointed out there are a lot of other factors. Very true.

I now have to also admit it was a bit of a trick question.

While I was trying to make the point a pessimistic market outlook should not deter you from investing, the real answer to the question "Is now a good time to invest?" has nothing to do with the market, or the economy or even stock valuations. None of those factors are consistent, accurate predictors of the future market direction.

The right time to invest in the markets is always when it's right for your situation. This is from a financial planning and strategic investment approach perspective.

When your portfolio has fallen below your target equity allocation, as defined by your investment policy statement, then it is time for you to invest in stocks.

This means that you, personally, have your affairs arranged such that your long-term investments can be left invested through a full market cycle, your income needs are met and you will not need to sell any equities before their time.

In one of my first Dollars and Sense columns in 1993 (yes, Virginia, it will be 20 years this fall), I pointed out there may be storm clouds on the investment horizon. That did not mean to cash out of all equity investments, but rather to make sure your affairs were arranged so you would not have to cash out if it became a bad time to sell due to a market correction.

This is the message we have consistently delivered over the 19 years since and following that advice has generally paid off.

So, are the markets going up or down this month?

The answer is that I have no idea.

What I do know is if your allocation between cash reserves, short-term guaranteed investments, longer-term fixed-income investments and equities is right for your personal time horizon, your need for liquidity, your need for income and your risk tolerance, you can have a successful investment experience over time.

The ongoing requirement is to rebalance -- either quarterly, semi-annually or even annually -- back to your target asset allocation.

This will help the market fluctuations work in your favour. You will automatically be selling high and buying low, to the extent of your rebalances.

Here's one more thing that drives me crazy and costs investors money. We constantly hear people say "The markets are doing poorly" or, occasionally, "The markets are doing well."

Here's the problem:

1. The markets are not "doing," the markets have only "done." Unless you are talking about the movements during an actual trading day, you are only talking about the past, not the present.

2. People usually assume, incorrectly, that when the markets have done poorly, it's a bad time to invest. Often it's the opposite, as we've shown.

3. To top it all off, these people are usually wrong in their perceptions about how the markets "are doing." It's amazing how often people say "The markets are doing poorly..." -- I guess based on headlines, the pessimism of the CBC or the sensationalism of Maclean's -- when in fact the markets have done well in the previous three months or six months or longer.

While it's true short-term trends sometimes tend to persist ("the trend is your friend"), every trend reverses. The cycle may be days, months or even years and the problem is that you don't know, until you get to use your 20-20 hindsight to tell everyone, "See, I told you so."

Focus on your own situation and the right investment mix for you. It's a lot simpler.

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It's Will Week! The Winnipeg Foundation, the Public Trustee and local lawyers are teaming up again to provide a series of seminars on estate planning. Go to www.wpgfdn.org/programsprojects-willweek.php for a full schedule.

David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).

dchristianson@wellwest.ca

Republished from the Winnipeg Free Press print edition April 20, 2012 B5