Clark Wealth Management Group - ScotiaMcLeod Fredericton

With market volatility on the rise and the business news flow turning negative, it’s time to review strategies to help investors get in the right stance to deal with what may be happening in the next while.

For as long as there have been markets there has been cause for investors to worry. The current concern is sovereign debt issues in Europe and elsewhere. Although we’ve seen Cities, States and Countries get into difficulty (even default) before, markets are more inter-connected now. Investors are also hyper-sensitive to the prospect of trouble ahead after the past few years.

I found an article recently from the Harvard Business Review helpful in framing how investors can keep themselves focused on what’s important. The article argues that to achieve long term success, we must focus on the middle term. It was written with success in business in mind but the concepts apply to investing.

In business there are activities that keep the bills paid and provide profit for the shareholders. These are called Horizon 1 activities. In a great business though there are products and services being developed that won’t generate profits immediately. This middle term is called Horizon 2. Finally there are the long term research and development (R&D) activities designed to make the business sustainable long into the future (Horizon 3 activities). R&D is relatively easy to fund because it’s often seen as new and exciting. It’s a challenge for any business to continue to invest in Horizon 2 activities that are not seen as new and exciting and won’t make a positive contribution to the bottom line for some time, particularly when times get tough.

If we apply this multiple horizon concept to individual investors we end up with the same challenges and observations.

If investors get too concerned about the current environment they may put all their investments in short term (Horizon 1) highly predictable and secure low yielding investments. When this happens the longer term sustainability of their capital is impaired because they may not achieve the necessary long term growth rate they need. Investments in this category would include short term GICs, savings and money market funds and short term bond & mortgage funds.

Horizon 2 investments might be those that can be left to generate returns over the middle term. These might include high quality dividend paying stocks, preferred shares and longer term bonds and conservative balanced mutual funds. Investors will have some price volatility to tolerate with investments in this category but can reasonably expect to receive a higher middle term return. Timeframes here are measured in years not months. Investors need to be willing to continue to invest in and hold these investments even though there will be periods when they are not producing positive returns. 

Horizon 3 investments compare to R&D investments great businesses make. Here investors buy and add to those investments that are expected to be worth substantially more several years out. Investments in this category are most likely to include stocks and equity mutual funds or ETFs.

Depending on their needs and goals, each investor will have a need to deploy a different weighting in each of the short, medium and longer term sections of their portfolio. The challenge for investors in the current environment is to first, establish the correct mix and then to focus on the middle term so as not to get thrown off their plan by volatility and alarming news reports.

For help getting your assets properly positioned and you focused on the right things, see an experienced, qualified advisor today.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.