Tuesday, September 6, 2011

Another recession?

Risk management is asking yourself a lot of 'What if" questions and building in the rewards of the good and the set-backs of the bad scenarios into your portfolio. Buying the Materials ETF (XMA) should let us benefit from continued growth in China and other BRIC countries without the risks of another Sino-Forest debacle and even with another potential recession in North America.

But if a recession is coming, is it with today's doom and gloom already build into the stock market or will the market fall even further? Say it falls another 20 or 30% as Gordon Pape asks himself gloomily in today's Globe Investor Gold, then what? You can wonder about all these scenarios but no-one knows for sure.

Really what are we trying to do, market timing? Have we already forgotten the lessons of our earlier analysis? The best returns come from buying at regular intervals regardless of market prices. Buy good companies at good prices or buy whole indexes and reinvest the dividends.

A large portion of our profits comes from dividends and reinvesting dividends. If you are out of the market you don't get dividends! Appreciation is important but it is unpredictable and delivers only over the long term. We learned this for real estate, but really it is also essential when investing in the stock market. You buy assets first and all for cash flow; thus you can sit out the downturns and you aren't forced to sell! Appreciation will take care of itself! If we are getting another recession there may be yet another buying opportunity during which we can boost our future profits even more! You don't want to buy at market peaks, but you cannot time the markets!

So here is the deal. Make a commitment to buy every month a fixed amount of stock, no matter what the market does. If you work through a discount broker, even buying small amounts is not going to cost you tonnes in commission. You save 10% of your gross income and you commit to buy stocks with half of your monthly savings. Someone earning $50,000 annually saves $5000 per year and invests every month $208.33 into a TSX ETF like aforementioned iShares S&P TSX60 Fund (symbol XIU). The remainder of your savings and investment income you use for one annual investment: a good solid company or ETF. Examples are Microsoft or the iShares S&P/TSX Capped Materials Index Fund (XMA). The timing for buying is up to you, but really there is only one thing that should guide you: buy a good investment at the right price! Now you're done and you can return to learning about investing at this blog, study stocks on your own, prepare yourself for an investment in real estate, or enjoy time with your family. Don't fret about the doom and gloom and sleep well at night. Voila!

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