One of my favourite comparisons to make - would you rather pay 75 cents per litre or $1.35 per litre for gas? An obvious answer wouldn't you agree? Yet when I point out that the stock market is much cheaper to buy right now, people appear to become defensive. Let me ask this - does anyone believe we will ever see the price of gas rise above $1.35/L again in our lifetime? Of course prices will eventually go up again (summer of 2009?), which will in turn help to drive up the markets. Now does anyone really believe that the Toronto Stock Market will never reach 15,000 again? Let's check back in 20 years and see how many times it crossed that threshold.
The global economy is in recession and will likely continue to do so for a while. But don't make the mistake of thinking that this translates into further stock market declines. No one knows where the stock market will be in six months from now.
A mistake that many people make is thinking that the stock market acts in ways that are entirely predictable or even understandable. While some facts reveal possible futures, take a look at the economic events during the five-year period of 2003-2007:
- Price of oil triples
- U.S. deficit spending soars
- Sub-prime lending crisis spreads worldwide
- Canadian dollar skyrockets
- Property values begin a massive downward spiral.
This seems to me like some pretty depressing economic news. Yet how did the stock market react? Well, Canadian markets were up over 100%, U.S. markets went up by 80% and international stocks were up by 168%. Anyone want to join me in some head-scratching?
Now if you had known these events were going to happen, you might have made the assumption that this wasn't a good time to save and invest. You would have missed out on essentially doubling your existing portfolio.
It's easy to get caught up in the tide of doom and gloom currently being preached by the market gurus, and to let that anxiety scare you away from the stock market. In October 2007, however, those same "experts" were claiming stocks were undervalued, just as the stock market was hitting new highs and about to take a huge dive. Most experts merely predict the past. Ignore those gurus who don't know that they don't know what the market will do in the short-run.
The most important fatcs to remember when markets go through this is to focus on the destination. If you are getting slightly off path, then it's my job to point this out to you even if you don;t want to hear it. I don;t worry about the market - I am there to provide discipline and focus to stay the course in order to reach your financial goals.
It's always a good time to save. Though, like dieting, it can be hard because it involves giving up some pleasure today for enjoyment years later. It's a lot easier to make excuses, like your investments won't perform well. Sometimes you can trick yourself into being a better saver. Now if only I could take my own advice when it comes to eating.
Don't kid yourself into believing that you are smarter than the market. By saying now is not a good time to invest, you're trying to time the stock market. Many people have tried, and the data is compelling on our market timing skill - we buy when the market is up and sell when it is down. So in the end, trying to market time usually ends up accomplishing two things: increasing your risk and decreasing your return. Now is the time to start saving and investing. The longer you stay in the market, the greater the chance you will be rewarded with a handsome return.
When I first started in the business, an older advisor showed me something about saving money and human nature. It still applies today and will work for just about everyone.
When devising a budget, make a list of your expenses. Now here's the part where I pull out my amazing Kreskin hat and astound you. For most people devising such a list, the first item on the list (assuming you have one) is your mortgage or if you pay it, then it's your rent. How did I know this? Human nature. It's usually you largest expense and it forms the foundation for you/your family. While this would seem to make sense for the most part, let me show you something very simple.
People in the first circle put their expenses first. People in the second circle put their savings first. In other words, people in the second circle decide how much to save each month, and then adjust their other expenses accordingly. Inevitably, they save more money.
Which circle are you in? Which one would prefer to be in?