"Real Estate Bits - 2"

If the markets have taught us anything over the past few years, it’s that a disciplined investment process will always be vital to achieving long-term investment success. A disciplined investment process means having a thorough understanding of your risk and return objectives and sticking to an appropriate investment mix for your portfolio. Yet for many investors this time-tested strategy is often abandoned when the markets get volatile, whether they're going up or down.

It’s Different This Time: It is often said that these are the most expensive words in the English language. Speculative stock market booms can’t change the basic laws of business… but fantasy can take over, for a time. One only has to look back to 1999 when investors had bid US technology stocks up into bubble territory. However, mere months later, they were blindsided when the technology boom came to a crashing halt. In general, the investors who avoided the worst losses were those that had a disciplined investment process and didn’t get caught up in the frenzy. Managing your emotions means not being guided by fear or greed.

Get Balanced: Studies have consistently shown that asset allocation can account for more than 90% of a portfolio’s overall volatility. That’s why the first step in a disciplined process it to design a well-balanced portfolio. This means defining your need for growth and your tolerance for risk. From there, you can intelligently diversify your assets among the major asset classes - cash, fixed income and equities - and also among a range of international markets and investment management styles. What you won’t do is chase the latest fad sector or pull all your money out of the market when your neighbour insists the government of the day is steering us into another Great Depression.

Stay Balanced: Balancing your portfolio is easier than keeping it balanced. Why? Because re-balancing means that sometimes you will have to sell a strong-performing investment in order to buy more of a weaker-performing investment and that might not feel right. Your portfolio is designed based on your personal risk and reward profile, as well as a clear understanding of the long-term performance characteristics of a variety of asset classes and investment styles. Rebalancing simply keeps you on track to the goals you set in the first place.

It may take discipline to sell a top-performing investment when it pushes your portfolio allocations out of line, but it’s also a strategy that could save you from an unexpected drop in the markets. That’s not the only benefit of disciplined re-balancing. Let’s say your portfolio has a target international equity allocation of 20%, but international equity markets perform poorly and drag your portfolio allocation down to 10%. At this point, if you buy more international equities and bring your weighting back up to 20%, you will be in a very good position to profit when international equities re-bound. On the other hand, if you don’t re-balance, it could take twice as long to recover your investment in that sector.

The Bottom Line: avoiding pitfalls and smoothing out the financial path to your goals is all about following a disciplined investment process.

Investing Psychology 101

Understanding how people can act irrationally can help you make more rational decisions. Consider that investment goals are closely linked to emotional needs - success, security, self-esteem and sense of accomplishment. Because of this, investors can sometimes make decisions that jeopardize their potential returns. An investment plan that takes a long-term perspective can help take the emotions out of investing. When it comes to investing, people are often more motivated to avoid losses than they are to acquire gains. This stronger psychological bias towards loss aversion is the reason why many investors make poor decisions by reacting emotionally.

“Buy low and sell high” may seem like a simple enough strategy, but even the experts find it almost impossible to time the markets. That’s why putting a fixed amount of money into an investment at regular intervals, regardless of market direction, is widely recognized as a sound investment strategy. Pre-authorized contributions can help you turn short-term market fluctuations into long-term success by taking advantage of market downturns and lowering your adjusted cost base.

Regards,

Nino Pasquariello

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