Monday, October 27, 2008

Step Right Up and Ride The Market Coaster

Sometimes the nicest things happen when you least expect them. The first bit of news is a link to a fantastic chart from Invesco Trimark that shows a historical perspective on why reacting now is the worst thing to do.

Every morning I receive emails from several different media outlets with links to financial related issues. Monday morning's Advisor.CA link delighted me to no end. Essentially an interview with three different senior management at three investment firms, it reallt reflects the views of many people within the investment field. Here is the link to the article, but I pulled out the main points below.

The article deals with the issue of "capitulation" - that point when investors quit being investors.

"While we've had markets in pretty steady decline, volumes don't really suggest capitulation yet," says Norman Raschkowan, chief investment officer at Mackenzie Financial. "In meetings with investors and advisors, the sense I have is that people are maintaining focus on their longer term financial goals and their personal plans.
"I don't sense a degree of panic from the average investor that you might associate with these kind of movements in the markets."

"There are a number of investors out there and most of them are not informed," says Curwood. "They get panicked by headlines in the paper, so some people run for the exit. As people sell out, that's the point you talk about market capitulation, when retail investors throw their hands up and say I want out at any cost."

Jeffery Shaul, president and CEO of Robson Capital Management, says market capitulation tends to happen all at once. There's usually a large decline that occurs throughout the day, but he says we haven't seen that yet. And, that might not be a good thing.
"What often happens to mark the bottom is an oversold market where you get all these sellers going out at once and capitulating," he explains. "But this kind of steady decline means people are holding on, which suggests we're not at a bottom."
Shaul expects more problems to crop up in the American economy before the markets turn around. He's worried about rising credit card default levels in the U.S., and when major corporations are forced to re-evaluate their pension assets. "You're going to find significant deficiencies in funding, he says. "Then you're going to continue to see worsening in the real estate market and significant layoffs," he adds.

"There's definitely a bad psychology out there right now," says Bruce Curwood, director of research and strategy at Russell Investments Canada. Curwood is slightly more optimistic. He says markets always come back, and with government intervention, it's likely things will turn around; he's just not sure when that will happen.
But it's a good sign that Warren Buffett is still planting money into the market, he says, because if he's doing it then things can't be that dismal. "He's one of the best investors in the world and he's trying to take this as an opportunity to invest."

It's a strategy others should follow. Curwood explains that if your clients are already invested in the market, they are already down, so why sell? "It's not the time to make a major decision or do anything dramatic," he cautions. "Markets are moving; there are huge swings over the course of the day. Just hunker down, put the money in a strategy you can tolerate for a long time. Don't sell out after going down 35%."

(Note - not everone is down 35%. This depends on the asset mix you hold).

Curwood points out that there are still a lot of companies with great value, even in the financial sector. He explains that when things get bad they get tarred with same brush, which means entire sectors are down whether they should be or not.

For the average investor, dipping a toe back into the market is still a frightening proposition. Raschkowan says clients may be waiting on the sidelines until they can get a better grip on what is happening.
"I think it will be mild in North America, but I think we will go through a recession," says Raschkowan. "People will now be waiting to se how companies have fared as they've had to work through this period of capital market disruption and slowing growth."

So should the market fear market capitulation or not? For the savvy client, it can't come soon enough. "Some of the best opportunities in the marketplace occur when the retail investor is running and taking all their money out of equities," says Curwood. "But, on the flip side, when retail investors are throwing their money at the market, it's time to get out."

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