The Companion Advisor: Techniques & Methods
Keep emotion from posing wealth risk

A Companion Advisor Article

Money gets people emotional. When we're making it, we want to make more. When we're losing it, we're anxious and fearful of losing it all. Will emotions and money ever go their separate ways? Not likely. The best we can hope for is to introduce some logic to the situation so there is some rational thought involved with money choices - so when we're making money we don't get swept up and forget to be discriminating investors, and when we lose some we can exercise some good judgment about what to do next.

With the increase of nearly 21% in the S&P/TSX Composite Index up to November 30, 2003, you might be less worried or even close to the optimism phase again (see diagram). While no one can say with any accuracy that we'll ride the market again to the point of elation, it's reasonable to assume that the time will come. Just as it's reasonable to assume that we'll experience anxiety and worry again the next time the market declines.

There is an exit from this emotional rollercoaster, and it takes looking at the situation through logic. We've seen five market declines in Canada since 1984, and it's safe to say we'll see some more over the next 20 years and beyond. Each short-term market decline has been followed by a rebound to positive territory. If you let emotions rule and if you made short-term investment decisions during market declines, there's a good chance your long-term wealth creation was impacted.

Over the long-term, stock markets have only gone higher. On November 30, 1990, the TSX Composite Index was at 3151.10 points. Thirteen years later, its successor, the S&P/TSX Composite Index was at 7859.39 points, a 149% increase. But in the years and days in between, there were hundreds of times when the market lost ground and hundreds of times when it made gains.

Looking long term - meaning 10 years or more - is the only way to be a savvy, and perhaps sane, investor.

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