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Whenever there are indications that the market may be nearing or experiencing a downturn many investors are often tempted to make hasty decisions with regards to their mutual funds.

The temptation, of course, is to sell-off a portion of their funds, wait on the sidelines until the market has bottomed out, and then go back in when it’s safe. This anxiety is especially pronounced for newer investors who have less experience with market cycles, and how it can impact their mutual funds.

Although market volatility may be unnerving to novice and experienced investors alike, these kinds of corrections are nothing new, and are a common market phenomenon. The best approach to handling these worrisome periods is to arm yourself with proven historical investment information, and seek professional advice from an Investment Professional.

So let’s begin by taking a closer look at what causes market volatility. There are several factors that can impact market movement, and subsequently, the rise and fall in the value of the various types of mutual funds. Among the most common factors are corporate profitability, inflation and large scale events such as political and economic factors. Corporate profitability is the most obvious. When profits go up, the market goes up, and most types of mutual funds tend to benefit with corresponding growth. When profits decline, the market drops and the repercussion is felt on certain types of equity based mutual funds as well. Corporate profits are in turn impacted by global economic conditions which go through natural cycles of growth and recession. Also, equity mutual fund performance historically weakens during times of rapidly rising inflation, which drives up interest rates thereby making fixed-income mutual funds more attractive. Thirdly, unanticipated political occurrences such the 1990 Kuwait crisis can have a significant impact on world market. In that instance the Toronto Stock Exchange dropped rapidly from 3,000 to 2,200 points, effectively ending eight years of recovery from the 1981-82 recession.

How Drastically Does This Affect Mutual Funds?

Although these ups and downs can create tension and uneasiness among investors, when viewed from a long term perspective, their detriment to mutual funds is less dramatic than often feared. Historically, rises have followed shortly after steep falls in the market, and mutual funds resume an overall upward trend.

What is the Smartest Way to React During Market Volatility?

One thing is certain, trying to time the market by getting in and out during these periods does not make sense. This practice is termed “lightening up” but is rarely successful because no one can predict exactly when the drop will occur. And if investors sell, there is always the danger that they will miss out on any subsequent rise in the market. If investors had tried to time the ups and downs of the market, they would have risked missing out on days that registered some of the biggest gains. The smarter way to view volatile periods is to think of them as opportunities to review your exposure to risk, discussing it if necessary with your Investment Professional.

What Should Drive the Selection of Mutual Funds?

Smart Investment Professionals and investors select their mutual funds based on fundamental financial indicators rather than on short-term industry or market trends. A mutual fund manager is focused on balance sheets, cash flows, and earnings to reveal a company’s true potential for long-term growth. Your focus should be on the same indicators. Solid performance and corporate profits drive market performance in the long run.

What’s the Bottom Line on Market Volatility?

The world is an ever-changing place, and volatility along with the potential for higher returns is the nature of equity markets. Investors who maintain a long-term outlook for their investments have an advantage over those who do not. Successful long-term investors understand that the market will always experience periods of decline, and that although stock investments are considered riskier, history has shown that stocks have a record of outperforming more conservative investments over longer time periods. In the past, equity investments have offered the highest returns. The key to surviving market volatility is a long-term approach, diversification, and a comfort level with your exposure to risk. Talk to your Investment Professional to set your mind at ease if you find yourself worrying too much about your investments.

This article was prepared by Fidelity Investments for Andray Domise, Independent Financial Advisor, who is an Investment Professional with International Capital Management.

Read a fund’s prospectus and consult an investment professional before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. Investors will pay management fees and expenses, may pay commissions or trailing commissions, and may experience a gain or loss.

Mutual Fund Myths

Investment Professionals have been providing advice and answering questions for generations of Canadians since the inception of mutual funds. While these days the average investor is much more knowledgeable about financial issues than ever before, it is often reported that a few misperceptions regarding mutual funds surface time and again. Likely, these myths are perpetuated by the media which tends over over-simply financial matters. To set the record straight, the following highlights some of the myths, and then sheds some light on the reality behind the perception.

Myth: The best way to diversify is buy as many different mutual funds as possible.

While spreading your portfolio thinly across many funds might achieve diversification to some degree, it is likely at the expense of performance, fees and focus. Your choice of mutual funds should be tailored to your objectives. How long before you retire? How risk tolerant are you? These kinds of questions should determine the selection of investments, including mutual funds, best suits you. A large number of mutual funds alone isn’t the answer. In fact, it becomes less manageable to track the performance of each fund if there are too many. Diversification is better achieved through an analyzed and strategic selection of funds. Consider, for example, asset allocation mutual funds. These funds are configured with diversity as the primary benefit; with investments dispersed across different asset classes such as stocks, bonds and fixed-income instruments. This way, if one asset class suffers a loss, chances are the loss will be offset by a rising return in another asset class. Choosing the right, not the most, funds is the best way to diversify.

Myth: The way to beat the market is to get in (or out) at the right time.

There is always temptation to sell-off a portion of your funds when the market shows signs of volatility. The theory is to sell just before the market drops, and then buy again just before it rises. If only life were that simple. Unfortunately, no one can predict precise market timing, and more often than not, investors who try this approach get burned. History has proven time and again that investing with a long-term view produces better results in the long run.

Myth: It’s good enough to wait until February and then buy mutual funds with any extra savings.

One of the great advantages of mutual funds is the ability to purchase them in small units. This allows the investor to make regular contributions throughout the year, and proves to be the superior method for mutual fund purchases. First of all, Iit imposes a measure of discipline that most of us need to ensure we are setting aside enough money for a decent retirement. Secondly, it allows the investor to take advantage of ‘dollar cost averaging’, a strategy whereby selected mutual funds are purchased regardless of the price of the fund. This way, if the fund goes down you can buy more of it, thereby strengthening your fund position when the prices rise again. On the other hand, if the fund price rises, your current holdings benefit. Could we add something that refers to PACs as a seamless forced savingsThe point is: the best way to buy mutual funds is to set aside an affordable monthly contribution and stick to it.

Myth: The nice thing about mutual funds is you don’t have to pay attention to them.

Many people get caught up in the daily running of their lives, and neglect monitoring their investments. However, It’s critical to follow the progress of your funds, and it’s easy! The mutual fund companies are an excellent source of information, as well as your newspaper, and of course, your Investment Professional. If there is a significant change in your personal situation (loss of job, purchase a new house, the arrival of children) you should review your investment objectives and determine whether changes to your strategy are warranted. The truth is you should always pay attention.

Myth: The best way to pick a mutual fund is to pick a top performer in the last year.

While past performance can be a very good indication of the fund manager’s ability to generate superior returns in one year, it is not necessarily a sure bet for another year. It is therefore much more preferable and advisable to evaluate a fund based on it’s long-term track record. Keep an eye on the consistency of the fund. These are much better criteria to measure against. Also, when you rate past performance, keep in mind market conditions at the time.

In summary, give your portfolio the attention that it deserves, and remember that a qualified Investment Professional can help provide objective and sound advice, and can answer any questions that you might have.

This article was prepared by Fidelity Investments for Andray Domise, Independent Financial Advisor, who is an Investment Professional with International Capital Management, Inc.

Read a fund’s prospectus and consult your investment professional before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. Investors will pay management fees and expenses, may pay commissions or trailing commissions, and may experience a gain or loss.

Don’t Keep Waiting ‘Till April To Get Your Money Back

As we get closer to the end of October, the spectre of the RRSP contribution looms ever closer. If you’re like most people, the end of the year means scraping together for gifts – and RRSP contributions. My clients are familiar with my philosophy on RRSP contributions: Make them early and make them often. But I don’t just flog RRSPs because they promote retirement savings and give you a shot at a nice tax refund. I promote RRSPs because they can help increase your take-home pay.

If you aren’t up to date on your contributions, don’t feel too guilty. Most Canadians play catch-up with last year’s RRSP contributions after the New Year. The problem with this strategy is threefold:

Every dollar of income taxes are subtracted from your pay is one less dollar you can put to work for you. Instead, it’s being put to work for the government.

When you file your tax return, and get a refund, you have informed the government about the deductions and credits you normally claim throughout the year (e.g. Those generated by RRSP contributions, tuition & education expenses for your child, deductible interest, etc). To lower the amount of income tax deducted from your paycheque, tell Canada Revenue Agency about these deductions and credits ahead of time.

Instead of playing catch-up with your RRSPs, set up an automatic withdrawal plan to transfer money from your bank account to your RRSP investment.

Example: Your usual RRSP contribution each year is $6000. Instead of making a lump-sum contribution, you break up the contribution into $250 payments that are invested bi-weekly. Not only is this more manageable, your first $250 has had one year in the market to grow. The next contribution has one year less two weeks, etc.

It makes more sense to have the withdrawal come out the same day your pay is deposited into your bank account. This way, you won’t be tempted to spend it. The resulting increase in your take-home pay should be used towards building your savings automatically. If you then deposit that money in a Tax Free Savings Account (TFSA), not only have you avoided having to pay tax on the income, you also won’t pay tax on any of your investment growth. As with all investments, this should be done automatically as well. Your monthly budget will be the same, but you will build a decent investment portfolio instead of waiting for the government to give you your own money back.

Maximizing Your Investment Goals

In the world of mutual funds, the key to success involves a few simple principles: Planning. Patience. Long-term thinking. While it seems like common sense, these virtues can make a big difference in achieving lasting and consistent investment growth.

That said, let’s examine some steps to follow when reviewing and planning your mutual fund portfolio and your overall financial or retirement goals. (more…)

Foreign Investments and Currency Hedging

Canadians travelling to the US immediately understand the impact of changes to the value of the Canadian dollar. After all, it wasn’t that long ago that our dollar was trading at less than 70 cents US, making trips south of the border painfully expensive. But then the greenback started falling in value, and the loonie, helped along by surging oil prices, hit a record $1.10 US. This 40-cent swing affected both travel plans and investments. And the loonie is on the path to parity with the greenback yet again. (more…)

Where are we headed from here?

Mackenzie Financial Chief Investment Officer Norman Raschkowan sees value in blue-chip companies and corporate bonds.

In spite of a strong March rally, equity markets registered their third straight negative quarter. Since the end of September, this downward course has been interrupted on five occasions by rallies that have seen the Canadian S&P/TSX Composite Index and the S&P 500 in the US jump 8%-10% in a week. This trading pattern is common for bear markets, and consistent with our expectation that equity markets would remain volatile, but with a sideways trend, while investors absorbed bad economic news through the first half of 2009. (more…)

Death and Taxes: Spousal Rollover

The inevitability of death and taxes is a time-worn adage that we all know. But the fact that we hear it so often doesn’t mean we should stand by and watch it happen. If you keep up with your income sources and tax brackets as you move from work to retirement, your tax bill can be delayed, reduced, or both. And if you plan your estate ahead of time, your surviving relatives can be spared a hefty tax bill.

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