Last week we briefly discussed stock indexes and what we are actually seeing when Peter Mansbridge tells us that the markets have risen or fallen on any given day. The index is just a weighted average of the value of the stocks of the largest companies on any given exchange. We specifically talked about the Canadian TSX as most of us have a particular interest in it even if we are casual investors through mutual funds or from some Manulife shares we received many years ago and have hung on to.

We have talked in the past about how market volatility makes many investors nervous and that to stay invested takes discipline and a commitment to a long term strategy. The next approach is to see market volatility as an opportunity. We are more than willing to take advantage of a sale when Canadian Tire marks down items by 20-50%, yet are panicked when Bay Street does that to some of our favorite stocks. If you are saving for retirement and your next purchase (for the same stock) is 20% cheaper, you’ll be getting 25% more shares for your money.

Not many of us feel that way. Of course this isn’t true of all of us. Retirees who are selling assets to fund post-retirement living expenses can’t afford to see the value of their investments fall. Those that are saving for retirement can find little joy in falling stock prices either.

There is a sharp contrast to higher returns after a period of volatility than during a period of relative calm. This is again human nature. When markets are relatively calm, more people invest, forcing prices higher. When the market is turbulent investors become fearful and prices become depressed because of it. The rebound of the markets after the sharp declines in 2000 when the high tech bubble burst or the turbulence in 2002/2003 after 9/11 have evidenced to us the continuing resiliency of the market. The market is designed to pay a premium for taking risk, and continuing to invest in a volatile market does takes discipline.

When markets are volatile a good relationship with your financial advisor is invaluable. We all need the reassurance we are on the right path and if not we need some trustworthy advice on what alternatives we should be considering.

Next week we will discuss further why we should take advantage of market volatility and why we should not become too reliant on so called “safer’ investments.

July 30, 2008