Sunday, October 19, 2008

Looking For A Rebound

Many of you may know of my affection for basketball, however the rebound I refer to is in the stock markets. No one can predict when the markets will turn (and stay turned), but history has shown that stock markets tend to rise before the general economy does. Many people wait on the sidelines until the economy brightens before investing. Unfortunately, that means they often miss some of the biggest gains in the market.

Predicting where markets will go is difficult, yet the accompanying chart from RBC shows how markets behave in a (dis)orderly fashion. While it remains difficult to believe given what we have experienced lately, the chart suggests the TSX will grow to between 20,000 and 35,000 points by 2014. While these numbers may seem like fantasy at this time, it only means a sharp bounce of 3000 points followed by 10-12% overall returns over the following years.

Since 1956, Canada has experienced 11 bear markets (defined as a 20% decline across the board for at least 9 months) that have lasted an average of 10 months. Excluding the current market situation, the majority of Canadian investors have only experienced the "tech bubble" of 2000-2002. Markets dropped 38% over a 13 month period. The numbers for the bull market that followed - a 90% increase over 5 years.

For older Canadians approaching retirement, they need to be somewhat cautious in their forward planning. Yet for younger Canadians, they don't want to miss out on what experts have termed "the buying opportunity of a lifetime". Burton Malkiel is a professor of economics at Princeton University. He had an excellent article in the Wall Street Journal last week on how people need to not "react". It is especially appropriate for older clients tempted to make changes to their portfolios now.

"The barn door is open and the horse is gone. Now is not the time to close the gate, lock it and burn down the barn. Instead, leave the gate open and try throwing some more hay in the barn".

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