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Helping You Understand Financial Planning and Investments
Don’t let the media throw
your investment plan off track
Gone are the days when financial
news could be found only in the
business section of the newspaper.
Not only will you find market
news on the front page, it’s also
on television, radio and the
Internet. In fact,
it’s never been easier
for investors to stay well
informed. But with all these
resources at your fingertips,
can too much financial information
be a bad thing?
As an investor in today’s market,
it’s extremely important to gather
all the information you can to help
you make informed decisions.
What you do with that information
is equally important. Basing your
investment decisions on headlines
and media reports can expose
your portfolio to two major hazards:
Choosing investments that aren’t tailored to
your individual circumstances and financial
goals.
Poor performance resulting from buying
yesterday’s top performers after-the-fact, or
selling yesterday’s under performers
prematurely.
By Sylvie Gamache
Stick with your investment strategy
A tried and true investment strategy focuses
on a gradual accumulation of wealth over
the long-term, and considers your investment
experience, current holdings, tolerance for risk
and the length of time you have to invest.
Relying too heavily on daily market events
can jeopardize your investment success by
prompting changes contrary to your overall
investment strategy. A focus on short-term
events can make you overly sensitive to any
temporary increase or decline in the value of
your investments. Equity and bond markets
can be volatile and all investments are subject
to short-term ups and downs.
In fact, attempting to prevent short-term
losses may actually lower your long-term
returns, not increase them. David, for example,
has a moderate tolerance for risk and is twenty
years away from retirement. As with many
investors, his portfolio suffered in the poor
equity markets of 2001 and 2002.
A regular reader of financial magazines,
David read many articles at the end of 2002
with headlines similar to “No end in sight for
market decline”. Tired of watching the value of
his investments shrink, he decided to transfer
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A
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Helping You Understand Financial Planning and Investments
Stick with your investment strategy (cont’d)
all of his Canadian equity funds into GICs
and money market funds to prevent further
losses.
The result? In 2003, David’s GICs and money
market funds earned a return of less than 3%.
If he maintained his equity investments,
he would have enjoyed a return of almost
25% in 2003, and a further 12% gain in
2004*. By responding to the headlines,
he made the mistake of selling at the bottom
of the market. Had he maintained his
long-term focus, he could have taken advantage
of the gains as the market climbed, and
recouped much of his earlier losses.
Trying to capitalize on short-term gains can be
equally detrimental for some investors, especially
those close to retirement. Planning to retire in
2002, Sandra had already moved most of her
equity investments to more secure GICs and
money market funds by the mid nineties.
Influenced by media coverage of the “hot”
equity markets, Sandra felt as though she was
missing out on higher returns. As a result
she transferred a significant amount of her
cashable GICs back to equity funds.
Caught up in the media hype and lure of easy
money, Sandra lost sight of the fact that she
was close to retirement, and therefore very
sensitive to short-term market declines.
Sandra experienced a significant decline in her
overall savings, and being close to retirement,
lacked sufficient time to allow for market
recovery in time for her planned retirement date.
Be a critical reader
The goal of most financial magazines is to
attract readers and sell more copies.
Which headline is more likely to catch your
eye: “The Five Hottest Mutual Funds” or “Buy
and Hold”? If you’re like most investors,
you’re going to want to read about the five
hottest mutual funds, then think about adding
them to your portfolio. However buying “hot”
investments may simply mean you’re buying
those investments at their top price, and then
watching the price decline.
The markets aren’t predictable, and financial
journalists don’t have an inside track on
which way they’ll go. While it may be possible
to identify some future trends, be very wary of
making decisions based on media reports that
predict future market movements. If you find
those types of articles persuasive, make sure
you verify any factual information from other
sources before making changes to your portfolio.
Be particularly careful about relying on financial
reporting at both the top and the bottom of
the market. Investors often question their
investment principles more at these times,
with a tendency to be overly optimistic in
rising markets and pessimistic during declines.
Media reporting may reinforce unrealistic
expectations at precisely the times when
you need to focus on basic investment
principles the most.
Always remember that financial reporting in
the media is geared to a mass audience, and
not to your particular situation. The insight
you’ll receive is not tailored to your personal
goals or long-term financial plan. Before you
make changes to your portfolio, make sure
they’re right for your investment strategy –
and not a response to financial headlines.
* Figures are from Globefund – using annual figures from 91-day
treasury bill index results and S&P/TSX Composite Index
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A
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Helping You Understand Financial Planning and Investments
Plan Member Responsibilities
Proper planning is an essential first step to reaching your long-term financial goals and
ensuring a financially secure future. Part of this planning process is understanding your role
as a plan member. You responsibilities include:
Researching and reviewing the investment options in your plan.
Determining appropriate contribution amounts for your situation.
Determining the level of investment risk and volatility appropriate for you.
Allocating contributions among your investment options.
Periodically reviewing your investment strategy.
Obtaining independent investment advice.
Sylvie Gamache is an Education Specialist in Sun Life Financial's Montreal Office.
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At a Glance Newsletter, Group Retirement
Services Marketing, Sun Life Financial, 225
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M5V 3C5.
This bulletin has been created exclusively for you.
It addresses issues to help you with your financial
planning and investments.
This information is provided to the Academic Money Purchase Pension Plan Members from
the Academic Money Purchase Pension Committee (AMPPC) as part of the ongoing information
and communication strategy.
This document and future communications are available online at: www.usask.ca/fsd/pensions.
Group Retirement Services are provided by
Sun Life Assurance Company of Canada,
a member of the Sun Life Financial group
of companies.