The market events of the past few weeks surprised us all just as much as the gut wrenching descent last fall. Where is the bottom? Have we seen the worst or are we exposed to more drops? Should we sell now until it settles a bit? Should we do something differently? What is the best strategy at this point? These are questions we all have on our minds.
Here are the top questions we have received from clients these days and with our response as well as potential solutions. Please take the time to read them. This should offer some relevant insight and perspective on the current situation.
My account is down. How bad is it?
Let’s see how bad things are out there? The year 2008 was bad and 2009 has stumbled so far. If we look at the world’s major stock markets for the 14 month period from January 1, 2008 to March 9 we see the following; TSX (Canada) -45.3%; Dow Jones (U.S.) -51.1%; S&P500 (U.S.) -54.3%; Hang Seng (Hong Kong) -58.6%; DAX (Germany) -54.2%. Even Warren Buffett, usually the world’s richest man and often acknowledged as the world’s greatest investor, saw the value of his Berkshire Hathaway company drop -48.3% !
When we look at our client’s portfolios we see that the losses for the same 14-month period are typically in the range of -23% to -33%. Clearly a drop of 23% to 33% is not a cause for joy but it is certainly much better than a 50% drop or worse. Diversification and asset mix has indeed softened the market plunge.
Am I going to lose more?
That is the million-dollar question. No one knows where the bottom is at this point. Some analysts say that we have seen the worst and other say that it will get worse before it gets better again. We are back to 1997 inflation-adjusted levels. That is 12 years of gains knocked back.
We are 15 months into the recession now and recessions usually last 10 months. While it is true that this is not a usual recession, we know that the recessions of the 70s and 90s, were very unusual as well. Though it may feel this way, right now is not the worst times ever! The 1991 recession brought stock values back 26 years after adjusting for inflation. The 1974 recession after adjusting for inflation brought stock market values back to 1906. That was 68 years of gains lost!! But as we all know now, we did recover. So, as unusual as this may seem now, this is not the first time that we experience drastic stock declines and many say that it was a lot worst back then. See below for an article on the subject of the 70s and 80s recession.
Yes but will it continue to decline in value?
The short answer is “We don’t know”. There may well be further declines. There is not a lot of rational in the market movements these days. It is largely based on emotion, not facts. Valuations don’t matter, financial statements don’t matter, and analyses don’t matter. There will be no newspaper headlines stating: “The bottom has been reached! Now is the time to buy”. Only when we get to the future and look back will we know where the market bottom was.
Why don’t we just sell and buy back later when settle down?
If it were that easy, we would have sold in late 2007, sat still for a year and a half and would be buying now. It is easy to see in retrospect. We knew then that a recession was likely to be triggered in the US due to the sub-prime mortgages excesses but we never anticipated the speed and depth of the decline. Selling is the easy part, knowing when to buy back is the near impossible to right part.
We can’t bail out now simply because markets can move very erratically. In fact, it is well known that if you miss the best few days of a recovery, you miss the whole rally.
If we sell now, and wait to buy back, the chances of missing these best few days is very high and that is why we do not time the market ever even if we do suspect that the markets are suffering from a pending recession. We know markets will recover, but we are not sure of when and how long it will take.
It is simply safer to stay the course, ride it out and wait for the come back. The come back always happens sooner or later simply because companies continue to grow revenues and profits.
I know all of this, tell me something different?
Yes we know all of this but yet, emotionally it is difficult to believe that markets will turn around this time as well. The only thing different we can say now is that if this type of fluctuation make you nervous, there are options which offers guarantees and it is essential that you know your options. One option is to use Segregated Funds which can guarantee your return of principle ten years from now or upon death while still benefiting from potential market growth. Some segregated funds even offer a 5% guaranteed annual payout. Ask us if you want to know more.
Can we just change a few things around?
The best advice that we can give right now is what we have said already. If you start drastically changing things around or completing revising your personal investment strategy, that is when we make errors. Changing things would usually mean moving from your current depressed holdings which right now have the likeliest and greatest potential for growth and moving them to lower return investments which while adding stability now offer a lesser potential for growth as the markets recover. It is best to follow only an annual review rebalancing process.
How long is it going to take to come back?
Counting dividends you may be surprised how quickly things will recover from their current depths. Many analysts, economists, central bank governors, governments and pundits seem to feel we will experience recovery in late 2009 and through 2010. Again, nobody knows but if most of us “expect or feel the recovery will occur in late 2009 to 2010” then that is probably when things will start to recover.
At the end of the day, what matters is “are you on track with your objectives”. If the retirement cash flow plan works then the returns are not that crucial in the short-term. If you are in a younger age bracket and in your prime savings years then you now have the opportunity to invest at levels not seen in many years. You truly do have the opportunity to “buy low”. At the end of the day we don’t think that it is possible to “sugar-coat” things and say that what is happening now is just fine because it is not. The current financial crisis is the worst that we have seen in our life times but this does not mean “that this time is different” and that we will never recover. The markets have recovered from all past crises and will recover from this one.
Please never hesitate to call us directly. We will be happy to speak with you regarding your account. Thank you for your continuing support in these challenging times. We value your trust very much.
Some articles you should read (you can cut and paste if the links do not work automatically)
Irrational Pessimism Has Taken Over Our National Broadcaster
Why This Recession Seems Worse Than 70’s and 80’s
Everything Will Be All Right, Warren Buffett
Timing the market