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Where Do We Go From Here?
October 3, 2002
It is only natural for weary equity investors to wonder if their resilience throughout the bear market will eventually be rewarded. The sharp declines in markets around the world are tempting many to consider selling their equity investments in search of perceived safer havens.
Despite all of the negative news in the equity markets, there are reasons to feel optimistic. The Canadian economy continues to feature strong business production, consumer spending, and buoyant job growth. The American economy remains uncertain, but low interest rates continue to fend off the risk of a double-dip recession.
Equity Returns Are Still Attractive
So why the big drop in equities of late? Equity markets in the short term are arguably affected far more by sentiment than they are by fundamentals. Today, sentiment is being driven by continued weakness in the technology and telecom sectors, geo-political uncertainty, and the ongoing fear of more accounting misdeeds being unearthed. Investors are only human, and the natural human response to a bear market is to sell-off investments out of fear and defensively fall prey to the "buy high, sell low" syndrome.
But before moving out of stocks, investors should keep in mind that equity returns have historically outperformed all other investment options over time. In a world where cash currently yields less than 2% and bonds return about 5%, the stock laden S&P 500 had an average annual return of 14.0% over the last 30 years, ending December 31, 2001. During that same time period, the Canadian stock market delivered a healthy return of 10.7%.
What's an Investor to do?
Staying invested in equities does not mean that investors have to remain idle during a market downturn. There are several strategies that investors can employ when battling a bear market.
1. Manage expectations for the long-term
An initial investment plan is the blueprint that is designed for the long-term; it is not designed in response to episodic market movements. Investors that abruptly take on a more conservative profile now, i.e. adding to fixed income investments, risk not realizing the long-term goals they originally designed their plan to achieve.
2. Remain diversified, or diversify more
A diversified portfolio across several asset classes and styles of management helps investors insulate themselves from any single stock disaster, such as the few we've recently experienced. A diversified portfolio also positions investors well, regardless of which specific area of the market may improve first, and ensures participation in a recovery from the very beginning.
3. Rebalance
Rebalancing back to the target asset mix ensures that portfolios continue to reflect the long-term goals and risk tolerances that were set out in the initial investment plan. Rebalancing adds a measure of discipline to a portfolio and reinforces the investment axiom of buying low, and selling high.
4. Contribute more, and more often
Consider contributing more, or making more frequent contributions, to take advantage of depressed stock prices. Regular contributions can help achieve long term goals.
Patience and Strategy
A patient and rational approach to managing investment portfolios is now more important than ever before. The Russell investment process - Multi Asset Multi Style Multi Manager™ strives to provide your retirement portfolio with prudent and time-tested investment approaches such as diversification, long-term investing and rebalancing. This dedication and professionalism can give you the confidence you need to stay the course during this difficult period in the capital markets.
Copyright© Frank Russell Company 2002. All rights reserved. See Legal Information. Date of first use: October 2, 2002.
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