Gime to get ready for the
recovery Atlantic Canada!
No one can say exactly when we’ll see a recovery. What looks like the beginning of a new long-term bull market today could turn out to be a short-lived “bear market rally” months from now – or vice versa. The key thing for investors to know is that the markets have always recovered strongly, even after a major economic crisis that, at the time, had many people doubting they ever would.
There have been other downturns as severe as the current one – The Oil Crisis (1973-75), The Early ’80s Recession (1980-82), Black Monday (1987) and the Technology Bubble (2000-2001), to name a few. Each time, after suffering a major setback, the markets recovered and continued their long-term upward advance, typically making up losses within two years.
History lessons: The market always comes back. Stocks generally recover before the economy.
History tells us that the markets will recover – but it doesn’t tell us exactly when. However, it does give us some clues. Most importantly for investors, history shows that the stock markets are a “leading indicator” of economic recovery – that is, they tend to recover before the economy as a whole.
S&P 500 Index Bear Markets (RBC Asset Management)
Since the Second World War, the longest recession has lasted about 16 months. If the current recession lasts as long, then we should start to see signs of an economic recovery later this year. As a leading indicator, stock markets should recover even earlier. For investors who have been sitting on cash, waiting for the economy to pick up before getting back into the markets, this is a crucial point. Waiting for actual signs of economic recovery could mean missing out on all or part of the stock market recovery.
Blink and you could miss it
Not only could a recovery happen sooner than many think – it could happen faster too. Often, recoveries are concentrated in just a few trading days, making it virtually impossible to accurately “time” when you should be in or out of the markets. As the following table shows, even missing just the 10 best trading days over 16 years on the Dow Jones would have cut your returns in half.
S=Dow Jones Index, 1990-2006)
It’s time in the market – not market timing – that counts
What’s more, there’s currently a record amount of money on the sidelines earning next to nothing, waiting to come back into the markets. In Canada, investors now have $74.9 billion socked away in money market funds – up from $46.3 billion just two years ago. In the U.S. it’s nearly $4 trillion – a truly staggering amount. As investors regain confidence, much of this money will come back into the markets, and could propel them upwards very quickly. So what should you do to get ready?
1. Start looking at your statements again
Like many investors, you may have decided to simply tune out what’s happening in the markets and wait for it all to end. Now’s the time to take a look at where you stand and determine if you should make some changes to reposition your portfolio for the coming days.
2. Clean out the dead wood
During a market downturn, most stocks typically go down. But not all of them come back, as downturns can expose weaknesses in certain stocks previously buoyed up by the generally positive economic climate. Clean up your portfolio by identifying which stocks you own that may not bounce back as strongly as others, if they bounce back at all.
3. Seize new opportunities
Many of the greatest opportunities arise during times of turmoil. As an investor, you can find many blue-chip stocks priced well below their intrinsic value. You can also find high-quality corporate bonds offering higher yields than normal to attract investment in today’s more risk-averse environment.
4. Regain your balance
The key to successful investing, like life, is balance. As an investor, you need the right balance between different types of investments to achieve your particular goals. For example, if you’re looking for security and income, you would typically want more bonds in your portfolio. If you need long-term growth, you would favour stocks. With the recent market turmoil, your investments probably need to be rebalanced to align with your goals.
5. Get back in touch with your emotional side
How you balance your investments isn’t just about your goals. It’s also about how comfortable you are with investment risk. Investors often find their risk tolerance drifting upwards with the markets, without even really thinking about it. Then, when the markets come back down, they realize they weren’t really prepared (emotionally or otherwise) to take so much risk. As an investor, it’s important take an honest look at your real comfort level with risk and adjust your investments accordingly.
Allan Morse is Vice President and an Investment Advisor with RBC Dominion Securities Inc. in Charlottetown, PEI. Allan can be reached at 1-800-463-5544 or Email here. Member CIPF, Insurance products are offered through RBC DS Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products, Investment Advisors are acting as Insurance Representatives of RBC DS Financial Services Inc.
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