Donovan J. Page Investment Tips

Hello I am Donovan J. Page CFP with Investors Group and today I want to talk about Managing Money.  Today’s topic: 

The perils of parking your investments

When it comes to your investments, there’s no such thing as ‘free’ parking – but that is exactly what many investors do when the stock market trends downward. Nobody likes market volatility and the current turbulence has driven some investors to sell their equity investments and ‘park’ their cash in savings accounts, money market funds or other ‘safer’ investments.

That may seem like a prudent course of action but there are a number of very good reasons why it isn’t – beginning with the fact that it will likely cost you significant growth over the long term. Here’s why.

‘Safer’ investments may mean lower returns

‘Parked’ money loses financial traction. Returns on these types of investments are typically very low and when you factor in the ‘real’ rate of return – the rate of return minus the inflation rate – they are even more abysmal.

Markets will always cycle up and down

It’s just an unavoidable consequence of economic life. But study after study has demonstrated that, on average, investors who ignore short term market trends and stay invested will gain over the long term. Here’s an example: An investor who stayed fully invested in the Standard & Poor 500 Index from January 1, 1990 to June 30, 2004, realized an 8.3% annual compound return (excluding dividends). Conversely, an investor who missed the best 40 days of the S&P 500 over that time (just 1.3 % of the trading days) would have realized a -2.2% annual return (excluding dividends).

Market volatility can be profitable for you

The hardest thing for any investor – amateur or expert – is to time the market, buying at the absolute low and selling at the peak. The solution is dollar cost averaging and it’s easy. By investing a fixed amount at regular intervals – say, $200 each month instead of $2,400 once a year – you can reduce the average cost of your investments by taking advantage of periodic low prices and you’re always in the market to potentially capitalize on those impossible to predict upturns.

Take your portfolio out of park

A positively performing portfolio looks like this:

· It’s diversified by asset class. Asset classes tend to perform well at different times so a diversified portfolio is likely to produce more stable returns.
· It’s diversified within asset classes. This can further reduce the volatility of overall portfolio returns.
· It fits your tolerance for risk. You should be able to sleep soundly without worrying about your investments.
· It’s a long-term thing. Ignore brief market drops and focus on your overall financial objectives.

To get all your investments on the road to financial success, speak to your professional advisor.