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When Investors Invest and When Investors Don’t Invest
An article was published this week in the Globe and Mail written by Michael Babad which highlighted the enormous amount of cash sitting on the sidelines in Canada. Surprised?
The actual headline of the article was “BUSINESS BRIEFING -Scared Canadian investors sitting on estimated $75-billion in extra cash”. The fact is that most people are too scared to invest. To people in the financial industry or in the financial news business, this fact is well known. There is a tremendous amount of money sitting on the sidelines.
Today’s blog will be short, but the issue is so compelling.
Why is Money on the Sidelines?
There was the Year 2000 computer paranoia,then
- the Tech Bubble fiasco where the Nasdaq fell dramatically, then
- the Money Market Freeze of 2007, then
- the Mortgage Backed derivatives of 2008, then
- the seemingly impossible dramatic rise of the market that seemed to ignore the state of the economy, then
- the DJIA fall in 2011, and now
- the Double Top in the DJI that seems to be indicating a market fall back to reality.
At the same time, we all hear how computer programmed trading is driving the market rather than value investing. We hear how the volume of trades that is driving the market is less than expected, so who is driving prices up. And on and on. Is it any wonder that the average investor is a bit paranoid?
The Herd Mentality
Like always, as in every cycle, investors will return to the market when there is a long term sustained market move upward, and when every taxi driver, and every newspaper vendor, is investing in the market, and everyone is boasting about how much money they made. Sort of like the Chinese markets were last year, before the Chinese markets started returning to earth and margin calls brought reality to the speculators who comprised most of the trading in those markets.
It is unfortunate that when the average investor hears how everyone is making money and then that investor ventures back into the market, the market will be at the top or near the top, and losses will soon start occurring. It is a vicious cycle that repeats and repeats.
Meanwhile, all that cash sitting on the sidelines is earning almost nothing, and people’s retirement funds are not growing. The effects are very negative.
What To Do
The problem is that everyone is forced to invest somewhere.
- Perhaps art and precious collections for a few knowledgeable collectors.
- Perhaps real estate for the adventurous who are confident that interest rates will not rise, and the real estate buying frenzy will continue to drive prices up.
- Perhaps currency fluctuations for the gamblers.
But in reality, whether it be through your own on-line brokerage account, or through your pension fund, or through your mutual fund, most people rely on the stock markets for their investing. Many don’t realize that whatever they are investing in, that investment then invests in stocks, but that is the reality.
Now is when the investor needs a good advisor; someone who takes a long tern calm and rational view. There are solid stocks that have held and will hold their value through the ups and downs. There are income producing securities that rise and fall less than the indexes that we all read about. There is a good selection of undervalued and ignored dividend paying stocks that pay far more than the banks do on the money sitting there.
One cannot sit on the sidelines, until the market becomes so dangerous that the investor takes the plunge into investing at the worst time possible. Investing requires a balanced and calm view over a long period of time. That does not mean “Buy and Hold”. Buy and Hold is a bad policy. Buy and Sell is a better policy. Buy when the time is right. Sell when a profit is made.
But sitting on the sidelines means the train leaves without you.
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