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Why savvy investors shouldn't be concerned with the latest market turmoil

Norman Rothery is the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

Labour Day heralds the imminent arrival of fall and the first day of classes. It also marks the end of summer vacations. More than a few investors will return to their desks in a sour mood due to the market's recent fluctuations.

The U.S. stock market trailed off last month and hit a moment of panic in early trading on Monday, Aug. 24, when the Dow Jones industrial average fell almost 1,100 points. The decline prompted some pundits to liken it to the Black Mondays of the past.

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But, in percentage terms, it didn't live up to the hype because the market fell 7 per cent early that day, finished 4 per cent below its previous close and went on to erase those losses later that week.

Over all, it was a kindergartner of a crash compared with the Black Monday of October, 1987, when the Dow Jones average tumbled 23 per cent.

The August decline didn't bother investors with balanced portfolios much at all.

For instance, Mawer's low-fee balanced fund fell 2.7 per cent in August, according to Morningstar.ca. That's not great, but such swings have to be expected from time to time. On the other hand, the fund climbed 10 per cent over the past 12 months (through Sept. 2) and it advanced by an average of 7.5 per cent annually over the past 15 years.

Sensible investors generally ignore the market's day-to-day, or month-to-month, fluctuations and focus instead on the long term.

Tracking daily changes – particularly when it comes to individual stocks – is a recipe for unhappiness.

But big downturns transform some people who thought they were long-term investors into panicky speculators. Alas, they tend to underperform over the long term.

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Smart investors stay on course even when the going gets tough. They fully expect to encounter hardship on occasion and can stick with their time-tested strategies over a complete market cycle. In other words, they stay calm and carry on.

But the actual response of different investors to a stock market crash varies depending on the strategy they follow.

For instance, dividend investors who love high-quality businesses generally hold onto their stocks during down periods and like to buy when prices are low. They might look to snap up a few shares of tobacco giant Philip Morris International Inc., which makes recession-resistant products and currently provides a yield of just over 5 per cent. It happens to be a favourite of money manager Thomas Russo and I own a few shares myself.

Famously cautious value investors like money manager Francis Chou are currently sitting on piles of cash in the hopes that stocks will fall dramatically. They'll be big buyers when they do. In his recent semi-annual report, Mr. Chou said of the market, "current conditions make me feel that investors are being set up for heartbreaking disappointment, especially for the unwary."

But he is more enthusiastic when it comes to resource stocks, which have taken a beating in recent times.

Seasonal investors, and market timers, should similarly carry on with their methods. Those who sell in May and buy in November might even be able to enjoy a good year after suffering from a few disappointing ones. But they know their strategy has an annual failure rate of almost 40 per cent despite its a long-term success rate of more than 90 per cent.

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All good investment strategies have their off periods when they lose money or trail the market. Savvy investors come to terms with that reality and follow strategies that suit them well and that they can stick with through thick and thin. When faced with the market turmoil of the past few weeks, they'll simply sharpen their pencils and get back to work.

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