What drives the equity market?

If the thought of investing in the stock market sends shivers up your spine, you're not alone. But John S. Clark, President of Pacific Spirit Investment Management understands both the market and his clients' risk tolerance level.

"Investing in the equity market is not for everyone," he explains. "It's volatile, moving up and down in value. Not everyone has the risk tolerance to invest in equities."

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Referring to the book Stocks for the Long Run by Jeremy Siegel, John explains the relationship between corporate earnings and market noise over the long term.

"Siegel noted that his research on the US equity market found that the long-term rate of return was 6.7% per annum plus the rate of inflation," he says. "He also found that the long-term growth in corporate earnings has been 6.7% plus the rate of inflation."

This relationship between corporate earnings and stock market growth is important, John says.

"Corporate earnings are key," he notes. "Everything else is noise. The fact that there's a hurricane, or Donald Trump wants to build a wall, or North Korea is sabre rattling is irrelevant. The key is, what are corporate earnings doing?"

But because the stock market itself does tend to react to the noise in the short term, it provides opportunities to sell stocks at inflated prices or buy at low prices.

"By capitalizing on the overall market reacting to noise rather than just earnings," John says, "you are presented with some profitable opportunities to both buy and sell."

When wouldn't it be a good idea to invest in equities?

"Because of the market's volatility, if you have a short investment time horizon then it's best to put the money in a guaranteed income certificate (GIC)," John advises. "For example, if you plan on buying a car in a couple of months, that money should probably not be placed in the stock market, because no one knows what the stock market will do in the short term. When you're ready to buy the car, it might not be a good time to sell the stocks."

Over the long term, though, your return in the equity market will be significantly higher than investing in a savings account at the bank.

"In today's financial environment, you're looking at 1% on a long-term GIC," John says, "Whereas in the stock market, you could potentially earn many multiples of that return."

For more information on Pacific Spirit Investment Management and investing in equities, call 604.687.0123, check out the website, send an email, or visit the offices at 1100-800 West Pender Street, Vancouver.

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