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Recent ups and downs of the market may have many investors frozen in fear.

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You certainly can't blame investors for being a little shell-shocked. The recent market volatility has been gut-wrenching for anyone watching the fluctuations in stocks – and the resulting damage to their portfolios.

However, volatile periods are often the best time to invest. As the old saying goes: "The time to buy is when there's blood in the streets." But with the violent ups and downs of the market, many investors may find themselves frozen in fear. For some guidance, we spoke to three investment managers about overcoming fear and indecision, and making smart decisions in these uncertain times.

Bill Shaw, partner and portfolio manager, Exponent Investment Management in Markham, Ont.

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As part of a financial plan, Mr. Shaw preaches the wisdom of diversification. As part of that diversification he sees this as a good time to add to holdings based outside of North America. He says stock valuations in Europe and emerging markets are currently more attractive than here at home. As a cost-effective way to invest in overseas markets, he favours two exchange-traded funds: the Vanguard Emerging Markets Stock Index fund (VWO) and the Vanguard FTSE Europe fund (VGK).

When it comes to the fixed-income portion of portfolios, Mr. Shaw notes that interest rates are rising around the world, which negatively impacts the value of longer-term fixed-income instruments. As a response, he offers a number of options, including investing in preferred shares, fixed-income products that have floating rates, and products based on short-term maturities. One recommended way to accomplish this is buying units of the BMO Laddered Preferred Share Index ETF (ZPR).

Brian Madden, senior vice-president and portfolio manager, Goodreid Investment Counsel in Toronto

Mr. Madden wasn't surprised by most people's reaction to the recent drops in stock prices. "Many investors seemingly were shocked by the swift market setbacks, having been lulled into a false sense of complacency, given the dearth of even garden variety pullbacks during the last two years." He says investors may be unsure how to react, because they view the recent volatility as an anomaly, when in fact it is actually the "eerie calm" of the past two years that is the real anomaly.

If you are uncertain about how to employ your cash assets, Mr. Madden feels showing some caution may not be a bad thing. "Cash is a four-letter word, but for an investor, it need not be a dirty word, despite nearly record low interest rates." Mr. Madden's firm advises clients to hold about 5 per cent of their accounts in cash and cash equivalents, which allows easy access for needed funds for lifestyle expenses without disrupting stock and bond portfolios. As well, cash can provide stability in a balanced account in times of market turmoil.

Mr. Madden says portfolio allocation is unique for every client, but the principle of diversification between asset classes and geography is universal. For some specific advice for investors looking to put funds to work right now, he recommends three stocks: the Bank of Nova Scotia (BNS-T), convenience store chain Alimentation Couche-Tard Inc. (ATD.b) and Franco Nevada Corp. (FNV), which buys a percentage of the output from various precious metals projects rather than owning the mines themselves.

As well, his firm is a strong believer in the value of active asset management, rather than relying on passive tools such as automated portfolios and ETFs.

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Lorne Zeiler, vice-president, portfolio manager and wealth advisor, TriDelta Financial, Toronto

"If an investor is paralyzed with fear, it is likely due to the emotional strain of investing," Mr. Zeiler says. He notes that especially in a period of low volatility and rising markets, investors often "let the winners ride" and even move more into the equity market based on past success. Consequently, they have too much risk, and their portfolio is overly concentrated.

"The best advice is to use methods to separate the emotion from the investment decision – creating a financial plan can help, as can working with a financial professional."

Like our first two advisors, Mr. Zeiler also says the key is creating a truly diversified portfolio. In equities, he recommends buying high-quality companies with growing dividends, reasonable valuations, market leadership and earnings growth. He also mentions that in this environment searching for bargains is likely not the best approach, because even where there is great value, these investments can remain trapped in a downward cycle, as we have been seeing with Canadian energy stocks. He sees international equities, particularly emerging markets, offering better growth opportunities – though he notes these are traditionally more volatile investments, so they should be only a limited exposure for risk-averse investors.

Mr. Zeiler also recommends that portfolios include fixed income, cash and preferred shares, as well as private assets. He says private debt, real estate and mortgage investments can be attractive areas, since they offer high levels of income, low volatility and are not correlated with the rest of the market.

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