Economist: Taking the Dive
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Economist: Taking the Dive

People work hard for their money, but they don’t make their money work hard for them. It’s time to fix that. Economist whips your income into shape with smart, practical advice.
Photo by Shahram Sharif.
Over the last week, those who followed the TSX must have reached for the Gravol. The index plunged 1,100 points, roared back with a 900-point climb, dipped by a few hundred points, and then recovered somewhat. Since the summer, the index has lost almost half of its value and is down to 2004 levels. Is there any reason to think about re-entering the market?

The collapse of the market is a combination of problems that would have been troublesome on their own: no one will lend to others, some companies borrowed too much money and won’t be able to pay it back, and the economy is slowing. Investors played their part, when, locked in the era of 24-hour news and constant ticker-watching, they became overwhelmed by fear and sold off into the downturn.
Making a move into the market hinges on buying stocks that are undervalued and then holding them until they return to a proper valuation. This won’t happen until the downward momentum is curbed. Luckily, although it’s still early, some experts are predicting a light at the end of the tunnel. For example, analyst Myles Zyblock of RBC Dominion Securities Inc. recently told the Globe, “We are probably closer to a bottom than a top for both earnings and equities.”
2008_11_26_Ec_2o.jpgSo when should you jump in? It’s all about doing your homework. Every investor should know what valuation makes sense to them (are you basing it on cash flow? EBITDA? P/E?), how low a stock price can go without affecting how they sleep at night (Warren Buffett suggests you should stomach at least a 50% drop in share price), and why their chosen companies will outlast competitors in this market. Doing the right preparations allows stability from the emotional battering that comes with investing.
With knowledge in hand, you can discover your tolerance for risk. The market is extremely volatile—several hundred-point swings are no longer rarities—and there are no guarantees in this market, only smart, calculated risks. If you’ll only invest provided your money goes up each and every day, try a GIC. The safest of the tactics could be John C. Bogle’s advice to invest in essentially the whole country by buying the index, since diversification reduces risk. If you believe the Canadian economy will chug along, then it makes sense to buy the entire S&P/TSX Index. It takes out much of the guess work and is one way to sleep easier at night.
Finally, if you have done your homework and can stomach the risk, take some time to look away from your portfolio. For many people, investing is a long-term decision. By not following the daily jolts of the swinging stock market, you can reduce the emotional instability that can lead to a bad decision. Some people treat investing like a sport, but, for everyone else, checking in once a week or once every two weeks will be better for your finances—and your blood pressure.
Screenshot from Google Finance Canada.