Last updated: October 07 2008

Rebounds? Not Soon; The End of the Stock Market? No

Gordon Pape, Publisher and Editor of The Internet Wealth Builder has this perspective (Reprinted with Permission):

Prior to last week, the TSX had never experienced a one-day drop of 800+ points. Now we have had several!

Those are truly staggering. Is this the end of the stock market? No, it is not the end of the stock market, unless you think that capitalism is dead. The market has gone through rough times before and has always emerged stronger than ever. Could things stay like this for a decade? Possibly - it happened in Japan, as another member points out elsewhere in this issue. But is it likely? No. Events are moving at such an accelerated pace that it is difficult to imagine the kind of stagnation envisaged by the question.

That said, it would be unrealistic to expect a prolonged rebound in the markets any time soon. In the fall edition of the quarterly publication Strategy, the analysts of RBC Capital Markets write: "The experience surrounding the early 1990s U.S. real estate bust argues for a prolonged period of sub-par GDP growth rather than a quick turnaround. Countries responsible for more than 50% of global GDP, which include Canada, are in trouble and leading indicators warn that the world economy will continue to soften into the first half of 2009."

During an interview on CBC Radio last week, the host asked me if there was any light at the end of the tunnel. My response: "There's light at the end of every tunnel. The real question is, how long is the tunnel?" No one knows the answer to that one.

People keep asking me what they should be doing in the current circumstances. There is no simple answer. In the end, it comes down to your personal situation and your risk tolerance level. As I see it, there are four possible courses of action.

Go shopping. There are lots of bargains out there. The problem is they may be even better bargains next week.

Sit tight. This is the best option if you have a reasonably diversified portfolio, are holding good-quality securities, and don't expect to need access to your invested cash for a year or more. The biggest mistake that investors make is to sell great companies when they're down. That's how folks like Warren Buffett get rich - by buying the stocks you've dumped at bargain basement prices.

Pare down. Another big mistake people make in tough times is to ignore their statements because they are afraid to see how badly they are performing. All that is likely to achieve is to make matters worse if the portfolio is poorly constructed. Call up your portfolio on-line this weekend if you have access to it that way. Review it very carefully. Identify the weakest holdings. Calculate your asset mix. If you decide at the end of the process that you have more stock market exposure than you want, begin selling off the weak sisters. But be strategic in your selling. Wait for days when the markets are moving up. This is especially important in the case of equity funds. Most mutual funds are valued at the end of each trading day and your advisor will have a cut-off time for accepting an order, usually 3 p.m. If you enter a sell order on a day the market is plunging, your price is likely to be lower (perhaps a lot lower) than the closing NAV the day before. The converse is true on days the market rises. So plan your selling carefully.

Bail out. We are experiencing a stock market sell-off of historic proportions with no let-up in sight. The bail-out package that the U.S. Congress finally cobbled together last week appears to have impressed absolutely no one. After weekend news from Europe about widespread bank bailouts there, investors lost all sense of proportion on Monday are were selling everything in sight.

High-yielding stocks and trusts have held up better than the general market but even the best of them were being hit in mid-afternoon Monday trading. Among our recommendations, Bank of Nova Scotia and Sun Life were down more than $3 at that point, Canadian Utilities was off over $2, and Enbridge and TransCanada were in the red by about $1.80. Among the trusts, Vermilion had slipped almost $4, Canadian Oil Sands was off $2, AltaGas was down $1.45, and Davis + Henderson had lost almost $1.

We suggest it would be a mistake to sell these or any other quality securities in these market conditions. While it is possible that the selling frenzy could drive prices even lower, we believe that 12 months down the road anyone who sells now will regret it. - G.P.

Gordon Pape is a best-selling Canadian author and speaker affiliated with The Knowledge Bureau and publisher of the Internet Wealth Builder.