The Globe and Mail, Report on Business
Published July 26, 2008

Since my last column, I've been holidaying at the cottage. Normally I disengage from the investment world for these two weeks every year. The message to my partners and clients is, "I'm not watching e-mail or thinking about the business. If something really important comes up, you know where to reach me."

I am breaking my rule this year because the markets have been particularly gut-wrenching in recent weeks, and the constant rain here in Ontario's Haliburton area has given me time away from water skiing. I am literally dodging lightning strikes as I write this (I'm sure there is a great analogy in there somewhere).

But my biggest problem, besides the rain and choppy water, is that I have nothing new or profound to say at this juncture of the market cycle.

It is the same problem most asset managers and advisers have: We haven't made our clients any money over the past year and they are getting impatient. We want to keep in touch and be there for them when times are tough, but we don't have anything to say that we haven't already said at least a few times.

Clients have heard that they must stick to their long-term strategy, both in terms of asset mix and money managers. They've been told to rebalance toward foreign equities and corporate bonds, but that hasn't worked yet. And they've been told numerous times that owning only Canadian resource stocks is not appropriate diversification.

And our answers to their questions are less than satisfying.

"When will my next purchase go up before it goes down?" There are no guarantees.

"Have the financials bottomed yet? Our banks won't get hit like the Wall Street firms, will they?" It's a bit of a black hole. We don't know for sure.

"What do you think of the Canadian dollar?" Whatever I tell you, bet against it.

Where we are today reminds me of something a former colleague told me a while back. "It's important to build a solid relationship with a client [in the good times], because the advice that matters the most will come at a time when they trust you the least," he said. I think we're entering that "least trust" stage.

When clients have doubts, there is almost nothing we can say that won't elicit a disappointed look or a roll of the eyes. A strategy that hasn't worked yet probably has more validity today than ever, but it has far less credibility.

As a side note, I am finding that there are many investors who have done well over the past year (i.e. maintained their capital in a very hostile environment), but are dissatisfied because "my portfolio has done nothing." As I've written before in this space, the expectation of a steadily rising portfolio is totally unrealistic. The ones that do go up every year (i.e. guaranteed investment certificates, T-bills) generate modest long-term returns.

So with that lead-in, here is the message to our clients:

We feel your pain: We are investing alongside you. Your returns are our returns.

Frustrating to hear, but sound advice: It is not the time to bail out on your long-term plan. There may be more pain and suffering in the near term, but it will be nothing like the devastation clients experience when they make a radical shift at the wrong time (i.e. loading up on technology stocks in the late 1990s or moving into cash in 2003). When markets are extreme and volatile, it is a bad time to change direction. Your plan was put in place for just this circumstance.

Believe me ... stocks go up over the long term: It's important to make sure you go back up with at least as much as you went down with. This means that if you've gone into a downturn with 60 per cent of your portfolio in equities, you'd better have 60 per cent or more when the market recovers. That means you have to do some buying or rebalancing before this is over.

Stocks are on sale: There are lots of stocks (and bonds) that are oversold and now represent compelling value. It's the time to sharpen your pencil and get ready to buy companies you want to own for the next five years. Indeed, investors with a long time horizon should be pumped and scratching around for more money to invest.

Baby steps are good: Those cheap stocks may go down further before they go up. There is nothing wrong with buying in stages. A stock should be bought with enough commitment that if the company reports poor short-term earnings and drops another 10 per cent, you will buy more.

What your adviser or manager tells you may not assuage your doubts and frustration. Some hackneyed phrases about riding it out will leave your desire for action unsatisfied. But in most cases, it is probably exactly the right thing to do.

In the meantime, there is some sun appearing over Crystal Lake (literally) and I have some serious disengagement to get back to.