“Be fearful when others are greedy… and greedy only when others are fearful” – Warren Buffet

When it comes to investing, we are our own worst enemies. As emotional beings, we can’t help ourselves. Our instincts are to act on our emotions when we should be leading with logic. Cycle after economic cycle shows the vast majority of investors buy when the markets are high and sell when the markets are low. They spend a lifetime doing this and then wonder why their investments don’t work out. The last 12 months have been a microcosm of this phenomenon.

Greed

Last April, the article that I wrote was titled Understand Your Big Picture. It was about having a well laid out financial plan in order to keep you from making short term mistakes that affect your long term goals. At that time, the market was in an upward trend and my comments were in response to a conversation I had with a client who wanted to take advantage for the ‘guaranteed’ trend upward and invest in India and China—a riskier venture with potential higher returns. At that time, I reminded him that according to his financial plan he did not need these increased returns, and would be risking his long term goals by over exposing himself to risk.

The S&P/TSX Composite index finished April 2008 at 13, 937. It peaked at 15,073 two months later in June 2008.

In Bull markets, greed tempts investors to take risks.

Fear

Six months later, I wrote the November article titled, Is Your Financial Pulse Racing? This time I was writing in response to conversations with fearful clients—the market had been steadily declining since June. Again, the emotional need to ‘do something’ was overwhelming for many people. Again, I encouraged clients to refer to their financial plans. Sometimes, the best thing to do is nothing.

The S&P/TSX Composite index finished November 2008 at 9,270.

In Bear markets, fear provokes investors to sell.

Logic

The current onslaught of negative press is aimed straight at your emotions. To be a successful investor, you must lead with logic. Your biggest ally in this endeavour is your financial advisor; it is your advisor’s job to keep your emotions at bay and stick to your financial plan. Keeping you up to date and educated is one way your advisor can help you make logical, not emotional, decisions with your investments and give you peace of mind. It is important to know what your advisor’s investment philosophy is, and understand it. Your advisor also has access to ongoing market commentaries that they can pass on to you—just ask to be added to their distribution list. Let logic lead you to successful investing.

As I write this article, the S&P/TSX Composite index has made nearly a 1,000 point gain in the last week. On March 9th it closed at 7,567 and on March 17th it closed at 8,560.

Contrary to how the saying goes, when it comes to investing, the important part is the destination—not the journey. As the above examples show, if you follow your emotions, the likely outcome is that you will be tempted to buy near the peak and sell near the bottom. The journey will take you through ups and downs, but in the end, if you stay focused on your long term goals, you will reach them.

If you would like to work with a financial advisor to build your Master Financial Plan, please contact Glenn Ayrton at ClearWealth Advisors at (604) 687-6808 or info@clearwealth.ca. GA

Glenn Ayrton is registered as an Investment Advisor through Sora Group Wealth Advisors Inc., a Member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund (CIPF). This information is general in nature, and is intended for educational purposes only. For specific situations you should consult the appropriate legal, accounting, or tax expert. This update is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any securities. The views expressed are those of the author and not necessarily those of Sora Group Wealth Advisors Inc.