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Market Perspective
Live and Learn
 by Ernie Ankrim
Director of Portfolio Strategy
Frank Russell Company
May 25, 2001
"Forward-thinking" has become a popular catchphrase recently, denoting all that is new, shiny and smart. "Backward-thinking," on the other hand, doesn't get much play. After all, who wants to be accused of living in the past? But living in the future isn't all it's cracked up to be, either.
That point was driven home by the abrupt deflation of equities, especially technology and Internet stocks, over the past year. In the run-up to the correction, all too many investors ignored the lessons of past booms and busts. This time, they said, it's different. It wasn't.
The Old School Rules
In 1999, advisors or individuals who preached the benefits of multi-asset diversification were frequently dismissed as "old-school." Two years later, they don't look so out of touch with reality. In fact, I suspect that the best-performing investors over the past two or three years are those old enough to have lived through the bear market of 1973-74.
That crash still holds the record for the biggest equity market decline over a 12-month period. Sure, investors who had been through it probably missed a lot of great opportunities in 1998-99, but they probably also avoided the severe losses that less-experienced investors suffered in 2000 and early 2001. Investors who didn't have a plan and didn't have much, if any, historical perspective on the market were the ones clamoring to buy Internet stocks and funds in 1999. And they're probably the ones who have been rushing into bonds in the past few months.
The Moral of the Story
The market correction, especially in the technology sector, is a good reminder that decisions which seem so easy and obvious can turn out to be very costly indeed. The dramatic market rally of the late 1990s, and its equally spectacular fall in 2000 and 2001, will be a distant memory some day. It's a memory, though, that could help us avoid the next temptation trap. We can take the time now to reflect on the lessons it's teaching: Avoid panic, beware the latest fad, and don't be afraid to stick to a plan that may look out of date over the short term but stands a good chance of paying off over the long term.
Carpe Diem
But you don't have to wait for "someday" to turn your recent experience into something positive. While the past two years are still fresh in your mind, write down the mistakes you'd like to avoid making again. Also, try to think back to the way you felt in 1998-99, and how you felt from 2000 to early 2001. Evaluate how much pleasure you got from the runup, versus how much anxiety you suffered during the downturn.
This can help you decide, going forward, how much risk you should be taking in your future strategies. There's no better time than now to put any lessons you've gathered from this experience into action: Avoid panicking, resist hurrying to buy the latest hot stock or fund, and, most importantly, refuse to throw in the towel. In essence, try to avoid doing what will come naturally to so many other investors.
In the end, there are three simple exercises that can make this environment a turning point in helping to cement your financial future:
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- Reflecting on the investment decisions you made and what motivated them;
- Recognizing when and how you can benefit from professional advice, and
- Learning from your experience.
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Copyright © Russell Investments Canada Limited 2001. All rights reserved. See Important Legal Information. Date of first use: 05/23/01.
Past performance is not a guarantee of future performance.
This is a publication of Russell Investments Canada Limited. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Russell Investments Canada Limited.
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