Monday, October 13, 2008

relax, take the longview

I'm sure as investors we've all seen the studies which indicate that over the long term we are better off being invested in the market, rather than not. Removing your money from the market for even a few days or weeks as part of an attempt to time the market can really handicap you from garnering good long term returns because nobody can predict what the market will do; and often the upward moves are quick and powerful. Case in point today as the S&P 500 index soared over 11%, the largest one day gain ever. Some stocks were up as much as 18%. The Bank of Nova Scotia was up 17.6%. This is not a penny stock, or oil and gas junior, or a hot tech. firm where large day to day swings in per share price are expected; this is Canada's third largest bank, a fourty billion dollar company.

What is happening in the stock market as well as the broader economy right now is ugly and there are real underlying issues that will take time and pain to resolve. The bottom line for me as an investor is that I don't require the money that I am putting at risk in the market for at least seven years. Due to this I can afford to brush off paper losses and take advantage of major weakness in stock prices to do some buying. The recovery is inevitable, the timing is unknowable. Corporations will continue to strive to grow earnings year after year and our capitalist world will enable them to do so over time. These same corporations will also continue to throw me growing cash in the form of dividends, to keep me satisfied as an investor in their profitable firms.

I am not sure if we have hit the bottom yet, nobody is, but one thing I do know is that many stocks are offering up much better value lately than they were months ago. Yields are up and P/E ratios are down. Many companies have earnings that are able to remain fairly stable through recessions and other market turmoil. Some companies will earn less money in the next few years than they did in the last few, but their share prices are reflecting anemic growth for the next ten years.

The point is that it really doesn't matter if we've hit bottom or not. A bell will not ring when we do, and the economic world will still look as bleak as it does now when we do. All a long term investor can do is remember that they are just that, long term investors, and continue to evaluate potential investments for purchase as they have always done or simply dump more money into the general indices, since they can buy more of them than they could last quarter. Avoid the temptation to do something reactionary with your long term equity positions to combat against the crash we saw last week. If you are not buying, consider doing nothing.

Yes, it is a giant sale on stocks, Shop Wisely For The Long Term.

Some great further reading here:
Your Retirement Income is On Sale, by Dividend Money

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Michael James said...

Great post. It's impossible to succeed at investing without understanding what you know and what you don't know. Many bloggers fall into the trap of making predictions when the truth is that they don't really know what will happen.

MG (moneygardener) said...

Thanks MJ. I enjoy making predictions in investing because it's fun, however I always consider that I'll be wrong when basing a decision on a guess about the future.

Dividend Growth Investor said...


As usual great post. I believe that if you have a sound fundamental strategy, then you can afford not to watch the stock market tick by tick.
Last but not least, dividend investors are usually the ones that keep making money no matter what happens in the stock market. Even if they closed the market, we'd still be getting dividend direct deposits.

MG (moneygardener) said...

Thanks DGI. I agree.

Anonymous said...

bns was downgraded by BMO today and the stock dipped while other banks raised. I took this as an opportunity to buy in at around 39. I think there is a lot of good deals out there right now.

Also picked up some husky this morning at 32.56 on the quick dip!