This may be the toughest part of my job -- sticking to good, solid, time-tested advice and strategies when the stock market and the economy are not co-operating.
The reward is when clients and readers say thank you after the storm has passed and they are still on track.
Today, we will look past the undeniable bad news in the economy and talk about what you, as a private investor, can do to reach your goals, no matter what the world throws your way.
And we have to do this while acknowledging the fact that we cannot predict the future. All I can guarantee about the future is that there will be surprises.
So it's a tall order. We'd better get started.
First, I will talk about the elephant in the room that some people are trying to ignore -- the economic prospects for the United States, and by extension Canada and the rest of the world, are not good right now. They could get worse.
A pessimistic view of the current economic situation reminds me of my second-favourite Saskatchewan joke:
What's the last thing you hear on a cockpit voice recorder in a Saskatchewan pickup truck?
"Hold my beer, Elmer -- this could be a rough one!"
We may be heading toward a period of stagnant economic growth, combined with inflation -- "stagflation," in the parlance of the economists. The worst example I remember was the 1970s -- also caused partly by soaring oil prices after the oil embargo. However, in 1973, oil prices actually tripled in six months.
So, as always, prepare yourself for a period of tough markets by setting aside money you expect to spend from your portfolio over the next two years in guaranteed investments. This avoids ever having to sell fluctuating investments when they are down. Don't do that.
Stabilize your portfolio with fixed-income investments, like bonds or even GICs. These will pay regular interest (albeit at pretty low rates right now) and give you guaranteed maturity values in from one to five years.
Your particular mix of stocks, bonds and short-term money is dependent on your personal situation -- your need for liquidity, your need for current income from your investments (or your savings capacity), your time horizon and your risk tolerance.
Always invest according to your time horizon. Short-term money is not used to buy shares of great companies, which will pay growing dividends, which will support growing stock prices. Long-term money buys those great investments. Stocks and equity mutual funds will fluctuate in value over the short term. Quality ones will grow over the long term. All will fluctuate down in the short term -- just ask owners of Canada's banks and insurance companies.
Try to ignore those short-term fluctuations, and be prepared to invest more long-term money in stocks when the prices become tantalizingly cheap. Remember, this has to be done when things look the worst. It takes guts.
Try not to panic and sell because things look bad. One lesson from the past is that buying stocks right in the middle of a recession is almost always the best time, not the worst. Almost all great stock-market rallies have started in the middle of an economic contraction. These may be the best of times, and not the worst.
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Draw inspiration from Sir John Templeton, a true pioneer of international investing and contrarian investment principles. He often said that he made his (and his unitholders') fortune buying stocks when no one else wanted them. He started in 1939 as the Second World War began -- surely a time of maximum worry -- borrowing money to buy shares of 104 companies that had dropped to $1 per share or less.
When the light shone on the world again, 100 of these companies had made him big money and an historic career was launched.
Sir John passed away this week at 95, leaving a legacy of investment wisdom, philanthropy and steadfast values seldom matched. He was one of a kind and will be missed.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column appears Fridays. You can e-mail him at dchristianson@wellwest.ca
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