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Market Perspective
Investment Behaviour in the Midst of Tragedy
 By Ernie Ankrim, Ph.D.
Director, Portfolio Strategy
Russell Investment Group
Oct. 24, 2001
"When people are buying, I'm afraid. When people are afraid, I'm buying. When everyone is selling, by definition, they're selling low." — Warren Buffett
Investors have a role to play and lessons to learn in defending against the kind of terrorism that led to such tragedy on Sept. 11.
In addition to the shocking human tragedy they caused, the attacks created serious financial repercussions. Airport closings and the public's subsequent reluctance to fly — at least in the first few weeks — hurt the stocks of airlines, hospitality firms and related companies. Re-insurer stocks plummeted as well, although the market realized that these companies will quickly recover their losses by charging higher rates.
So how great was the impact on our economy? By some measures, we already had been slipping into a recession. The Sept. 11 events gave us another strong push in that direction. Those who foresaw a quick recovery cited the Fed's nine interest rate cuts totaling 4% over the past 12 months. They have reduced credit card and mortgage rates, and lowered corporate financing costs. However, only time will tell how these rate cuts impact the economy.
A Clearer Path Through the Months Ahead
With stock prices of many good companies depressed, investors who continue a normal savings pattern could add to their positions. Of course, now more than ever, they must know which stocks and funds to pick.
 Simply rebalancing a portfolio can help. Rebalancing is a risk-management tool that counters emotional reactions by keeping portfolios in line with long-term goals. When the markets drop, a portfolio becomes unbalanced. Whatever an investor's asset allocation profile, the equity portion becomes smaller than desired for that point in time. Investors who are now rebalancing are selling bonds or bond fund shares while they are high and purchasing equities at low prices to bring their allocation figures back in line.
When the markets rise, these investors will again rebalance — making decisions based on their personal life plans and risk tolerances. They'll sell some equity shares at higher prices and buy fixed-income instruments at lower prices. They may not always boast the highest short-term returns, but they may invariably sleep more peacefully knowing that their long-term returns are solid and their portfolios less volatile.
Staying Objective During Times of Stress
Sudden decisions can hurt investors. The markets react strongly to short-term events. Yet the markets often recover quickly. When they reopened on Sept. 17, the Dow was down 1,000 points because many investors' immediate reaction was to sell. However, at day's end, the Dow had closed only 600 points lower. Take AMR (American Airlines), for example. On Sept. 10, AMR closed at $30. Its first trade at reopening was $16. Yet it closed the day at $18 and was above $21 on October 5. United and Delta stocks paralleled American's.
The markets in general showed remarkable strength. On Sept. 10, the Russell 1000® closed at 575. It went down to 550 on Sept. 17 and even dipped below 500 on Sept. 21. Yet on October 5, it closed at 561.82.
Investors who put in sell orders after the attacks received what appears to be the absolutely lowest price, violating the age-old principle, "Buy low, sell high." They reacted emotionally. But in the face of tragedy, we want to be as rational as possible — call loved ones, pray, donate blood but do not sell off our portfolios before analyzing the situation.
Moreover, an attack in March/April/May or September 2000 — as the "Tech Wreck" was taking place — could have spurred a much more damaging sell-off. That "irrationally exuberant" market could have seen a 25-35% decline with even the most disciplined investor having difficulty holding on. As it turned out, the US market recovered almost two-thirds of the post-Sept. 11 losses by October 5. This probably wouldn't have happened in 2000.
As a parallel for our Canadian market, the TSE 300 Index fully recovered and returned to its pre-attack price levels within weeks. Between Sept. 11-22 the TSE 300 Index had lost 6%. However, by Oct. 22 it had gained back 10%.
Copyright © Russell Investments Canada Limited 2001. All rights reserved. See Legal Information. Date of first use: 10/24/01.
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