Wednesday, November 5th, 2008
A few weeks ago I wrote an article titled Panic or Profit and many folks thought I was just spouting theory. While that may be, the recent evidence of my “theory” has been proven at least half true thus far.
According to the Globe and Mail, panic sticken investors in Canada pulled a record $8.45-billion from the mutual fund market in a stampede for the exits. It was the worst month for net outflows since the Investment Funds Institute of Canada (IFIC) began collecting data in 1990, and nearly doubled the previous record posted in September, which saw net outflows of $4.5-billion.
Panic Selling
Of course many will be inclined to argue that those who pulled thier funds from the market in early October were smart and can now re-invest at lower prices. While this is true, the figures shown are net outflows for the month – so we’re not talking about trading or churning of these funds. This data is a decent representation of those investors who panic-sold.
Further to this point, most seasoned traders, who would be more inclined to recognize the market conditions and sell their holding to re-invest at a later date are likely not invested in mutual funds, but rather individual securities.
One such example of an individual who panic-sold is Norman Bambrick, a 72-year-old retiree in Port Perry, Ont. He bailed out of his bank fund after seeing his $200,000 investment in two accounts take a $12,000 haircut in 10 months.
“The funds didn’t work out for me and I cashed them,” Mr. Bambrick said.
“I had a feeling that they were headed for a disaster,” he said. “I had no confidence in them.”
What is even worse about this example is that the gentleman suffered just a 6% loss to his portfolio. This is an indication that he has received some incorrect advice about his risk tolerance and the investments that he holds.
Understand Your Risk Tolerance
If Mr. Bambick could not tolerate a 6% loss to his portfolio, he should not have been invested in those vehicles. At 72 years old, with such a low risk tolerance and relying on his portfolio for income, Mr. Bambick should likely be invested in Guaranteed Investment Certificates (CD’s in the USA) and Fixed Income securities only. Fortunately, that is exactly what Mr. Bambick did with the proceeds from the sale of his funds.
While this example is of an investor who was not likely in the appropriate asset allocation for his situation, it is still an example of panic selling. When we sell out of fear instead of understanding our fundamental reason for selling we often lock in losses. And, by the time we get up enough “courage” to return to following our original investment plan (when general market sentiment turns positive), we have often missed out on the initial upside gain.
The moral of the story is this:
- If you were lucky/smart enough to cash out before the downturn – don’t be too late to re-invest those proceeds because prices are much more attractive now.
- If you panic-sold during the downturn get prepared and develop a plan that is comfortable for you. Don’t miss out on potential gains when the market turns the corner.
- If you have been holding throughout, stick with your plan because this time is not different and equities will rebound as market uncertainty eases and we return to the fundamental valuations.
I personally fall into category number three and have been buying dividend growing stocks and some index ETF’s over the past 5 weeks.
Which category are you in?
Posted in Investment News | 6 Comments »
Monday, October 27th, 2008
As we saw on Friday, the current financial crisis has investors all over the world living in fear now. And this time, it’s the government who is helping businesses to bring down what is crippling markets – the credit crunch precipitated by the U.S. housing collapse.
Governments in North America, Europe and Asia have provided bailouts to troubled financial institutions, liquidity to money markets and guarantees to banking systems. And all of this is in addition to drastic interest rate cuts. Fortunately, there are some very encouraging signs that these initiatives finally are starting to work.
Some Good News For A Change
Indications that credit is starting to flow
- The rate at which banks lend to one another known as the London Interbank Offer Rate (LIBOR) decreased from a peak of 6.88% earlier this month to less than 1.3%.
- The spread between 3-month LIBOR and U.S. Treasuries (the risk-free rate) decreased from a record high 4.65% earlier this month to 2.7% on Friday. A narrower spread means that banks are more willing to lend to each other.
Good news for U.S. housing
- U.S. fixed-mortgage rates decreased helping more borrowers qualify
- Variable rates continue to decrease due to Fed rate cuts
- Oil and gas price declines result in more affordable heating costs for homeowners as we head into the colder months
- Data from August and September shows reduced inventory of U.S. homes. The 10.6 months supply of homes in August slipped to 9.9 months supply in September
- The FDIC and the U.S. Treasury are working on a proposed plan to prevent avoidable foreclosures by offering guarantees to lenders and companies that service mortgages
Despite these encouraging signs, we will continue to see volatility as investors react (or is that overreact?) to every new piece of information released.
Facts About Stocks and Recessions
There’s a lot a worry about the recession now. But what’s important to remember is that equity markets tend to be leading indicators of the economy.
Looking back through history, equity markets have typically retraced prior to, and in the early stages, of recessions. Once equities have reached their lows, they tended to rise quickly preceding the broader economic recovery.
So, make sure you don’t let yourself fall into the mob mentality or you may find yourself missing the upturn in equities.
We don’t know exactly when the recovery will commence, but over the long-term equities has still been the top-performing asset class. And out of all the equities, the dividend growers have been the most stable.
Posted in Investment News | 4 Comments »
Friday, October 24th, 2008
Is it just me, or does it seem like the media is playing a large part in the widespread financial panic that has consumed the globe?
I know the media is in the business of selling “papers” but still I wonder why they always seem to play up the negative? This only serves to feed the panic and thus make an already irrational market further disconnect from the fundamentals.
Is there any time when they should consider playing up some of the positive stuff, like companies that continue paying dividends, increasing liquidity, interbank credit easing etc. instead of feeding the panic.
Is A Balanced Representation Too Much To Ask?
I am not suggesting for a moment that they hide the truth. However, all we are really getting is an opinion and interpretation on what is happening – but does anyone really know what is happening?
The average person on the street panic and because of the sensationalism of the situation portrayed by the media, cannot differentiate between opinion and facts. The average Joe may panic and liquidate his 401k and not even really know why he is selling, other than the fact that the media is bombarding him with messages of companies going bankrupt and people losing their life savings etc.
Worse yet, a study found that increased suicides and homicides are linked to the financial “crisis”.
An out-of-work money manager in California loses a fortune and wipes out his family in a murder-suicide. A 90-year-old Ohio widow shoots herself in the chest as authorities arrive to evict her from the modest house she called home for 38 years.
In Massachusetts, a housewife who had hidden her family’s mounting financial crisis from her husband sends a note to the mortgage company warning: “By the time you foreclose on my house, I’ll be dead.”
Then Carlene Balderrama shot herself to death, leaving an insurance policy and a suicide note on a table.
I certainly don’t have all of the answers, if any at all, to these issues. However, I am becoming very disheartened with the mainstream media as they continue down a path that leads to more destruction that good. The above shows the outcome ofpeople feeling hopeless about their situation, financial or otherwise. Media outlets fuelling such hopelessness certainly doesn’t help.
Front page headlines do not necessarily need to be filled with hope, but I believe the media owes the public the opportunity to receive sound and relevant news about the state of the economy and their personal finances.
What Would It Take?
What would it take for the major media outlets to band together for the greater good of our global society and present quality information that would help to instill the appropriate (read: more rational) level of confidence in our monetary system(s)?
I know that much of the turmoil in the financial markets is real. However, for media outlets to portray this as the “financial apocalypse” is absurd, and in my opinion, unethical. Yes, there is cause for concern about the economy and the financial markets, but the infusion of undue fear on to the public is shameful.
At a time when media sources could be encouraging us to learn more about our economy and educate ourselves on personal finance, credit, and investing, they choose instead to churn out headline after headline proclaiming the next depression and the longest deepest recession in history etc.
One must wonder if there will ever be something bigger at stake than selling papers?
Posted in Investor Education | 6 Comments »
Friday, October 17th, 2008
The market volatility of this week has continued to keep investors on the edge of their seats. This roller coaster ride leaves many repeating the same word heard in most news reports on the subject: Unprecedented.
Although this is the type of word that perpetuates the fear that has gripped the current market, to me it seemed more than fitting. That is until I took a look back in history and chatted with a few of my “investor” friends that have been around a lot longer than I have.
Is It The 1980′s Again?
The period I often hear cited is the early eighties. At the time, the prime lending rate was 20%. Around June of ’82 markets had the worst one-year return on record at about -40%. Even the music was rough: Dire Straits was singing ‘Industrial Disease’ and lyrics to Bruce Springsteen’s hit said “…these jobs are going and they ain’t coming back”. It was a daily occurrence for investors to drop off the keys to the house they could no longer afford. Sound familiar (minus the lending rates)?
We are all familiar with that bear market ‘dip’ of the early eighties from referring back to the Andex Chart of market returns. But what’s missing from the Andex chart is what was so poignantly described as “…the sheer and utter fear we all felt at the time”… similar to how many investors have been feeling lately.
We must remind ourselves that time dulls the fear just as it smooths out the peaks and valleys of market returns on that well-known chart. For as bad as that time was, the investors who lived through it have commented, “I would give anything to go back and buy up some of those stocks people were running from, or a few of those houses that no one could give away at the time”.
Put Stocks In Perspective
The key message here is to help reinforce the importance of perspective. Since the early 1900s we have had many market crises and experienced the fear that accompanies them. And although the current culture of 24/7 news access may amplify those fears, we cannot say with certainty if the bottom is near or when the markets will turn the corner. We can only say that markets have proven their resilience through similar markets of the past and gone on to new heights.
That said, why should this time be any different than the “end of the world” scenarios of past market corrections?
Posted in Investment News | 5 Comments »
