If you have read my other articles, you will understand that I believe sometimes you just have to ignore the market. What has happened over the last year can definitely be an example of this. I am not saying to avoid changing allocations or finding investments that have been out of favour with the market, but sometimes you do have to make decisions based on the long term.
Over the past year and a half, the market has, in my opinion, got ahead of itself on the upside and has been subject to a few small corrections. When stocks or indexes go down, an investor has to decide whether this is an expected reset or if perhaps they are still not at a level where investments are warranted.
One of the easiest ways to judge pricing is by looking at the Price-to-Earnings ratio. This reflects what a stock’s current price is and how many years of that company’s earnings it would take to earn your money back if you invested at today’s price. There will be many opinions on what an index should be priced at, but traditionally the Canadian market TSX index average is in the 15 range and is currently just over 20. The US market’s S&P 500 is traditionally around 17.9 but is currently at 28.36. What this tells me is that, in my opinion, entry points into index funds might not bring about long-term success.
These are broad opinions, of course, but they start to help guide how to approach the market and investing as a whole. I have written about the use of both risk management and alternative asset classes, as these can help provide diversification when markets do get choppy.
I have gone over time-based allocations previously, and this is extremely important. There are times to extend risk and times to be cautious. As mentioned above, looking at Price-to-Earnings ratios can help guide you as to whether you are paying for value or whether you might be overpaying, with a greater risk of losing money than making it. What you are trying to do is make the most informed decision you can. It is never a time for rash decisions or to react emotionally to the market. Those who react emotionally increase the chance of making the wrong decision. This is exactly the behaviour you want to avoid when investing.
You want to make good decisions, because sometimes investing is like being at the grocery store and deciding whether an item on sale is truly good value. We all know there are times when a product on sale is not in our best interest. Investing can be exactly the same focus on value and your long-term returns when evaluating funds. Ignore what needs to be ignored, and rationally decide which investments give you the best chance to meet your needs and goals.
