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Taking Stock of Market Woes
As a crisis of confidence hits the markets, investors might be tempted to dump their stocks. They, along with many of their fellow investors, cannot be blamed if they are disillusioned not just by the prolonged slump in the equity markets, but also by the continuing scandals that are rocking the equity markets.
Auditors have failed them, analysts have misled them, CEOs have flipped from being economic leaders to greedy thieves, and corporations have distorted earnings to boost their stocks. What's worse, it seems that each disclosed transgression is bigger than the ones that preceded it.
Case in point: On Tuesday, the largest case ever of self-identified accounting errors - US$3.8 billion at WorldCom - became the latest disclosure to disturb investors and continue market turmoil.
As a result, many investors feel they no longer can rely on anyone in the corporate or business world. The era of irrational exuberance has been replaced by the age of bitter disillusionment.
So isn't it time, they might ask, to get out of the equity markets altogether and to flee to the relative "safety" of:
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- real estate — the Russell Canadian Property Index returned 2.2% in the first quarter and has been positive for over five quarters. It has a one year return of 9.8%.
- bonds — up 2.1% year-to-date through June 27 based on the RBC CM Canadian Bond Market Index;
- gold — up over 40% year-to-date through June 26 based on the CBOE Gold Index. Nine of the top 10 funds in the Morningstar Canada mutual fund universe as ranked by three-month returns through June 25 were Precious Metals funds, with returns among those nine ranging from 25% to 44%.
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All of which have handily outperformed Canadian stocks - down 7.8% year to date through June 27 based on the S&P/TSX Composite Index.
No - not as long as stocks remain part of a well-diversified portfolio, say Russell portfolio advisers.
The time to have invested in real estate, gold and fixed income securities was before they went up strongly, points out Ernie Ankrim, Russell's chief portfolio strategist. Those who diversified earlier were well positioned to take advantage of the upturn in those markets.
"If anything, it is often during periods of great uncertainty and crises that prices become depressed the most," Ankrim says. "That's not to say that things will turn around dramatically tomorrow, but the prospects that they will improve long term are good."
The only way to realistically expect to be in those asset classes is to hold them at all times, Ankrim says.
Adds Randy Burge, Russell's Director of Portfolio Management, "For long-term investors, the case for stocks as part of a well-diversified portfolio should be as strong now as it was in 1999. The fundamental arguments have not changed - unless your financial or personal situation has changed."
Copyright© Frank Russell Company 2002. All rights reserved. See Legal Information. Date of first use: June 28, 2002.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
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