The decline of North American markets continues with no apparent relief in sight. What can investors do with their portfolios to relieve some of the pain that they are feeling? Are there any investments currently rising as the general markets continue their fall?
A quick update on the TSX and New York markets reveals that they have been hovering at their November lows for about three and a half months. However, since mid February, the New York stock markets have been in a free fall on moost trading days, while in Toronto, the market has fared a little better, as gold mining stocks keep it from reaching new lows.
There are likely many reasons for the most recent fall, including possible bankruptcies at GM and Chrysler, no new details provided on U.S. bank bailouts, or perhaps investors are just tired of the treacherous stock market and do not want to invest until things get a little better. Whatever the reason, the Dow Jones Industrial Average in New York is down 25 per cent, the S&P is down 24 per cent and the TSX is down 16 per cent in just the first nine weeks of the year.
Even after such a horrible start to the year, investors should not panic and move all money to cash, because they will need to have a percentage of their portfolio invested to take advantage of the coming rebound. If an individual were to pull a significant chunk of their investments from the market, how long would it take for them to make back the money they have lost through fixed income securities like bonds or GICs making between two and four per cent? It could be years, meaning there is a fine line to walk when deciding how much capital to take out of the market. Moving money to a defensive position is a gradual process initiated over time, not something done all at once. For those investors concerned about their investments because of a belief that things will get worse, I recommend moving money gradually out of the market and into low risk investments until the day comes where they feel comfortable enough to re-invest. If an investor chooses this method of risk reduction, they have to be realistic and know that if they do try and time the market, there is a good chance they could miss the first 30-to-40 per cent of the rebound before getting back into equities.
An alternative to moving money out of the market and into low paying GICs and savings accounts is to bet against the market. Individuals can make investments whereby if a group of stocks or a whole index falls, you can still make money. This term is called selling short. A person can short a portion of the market or an index by investing in bear market index investments (example ETF’s) which trade on the stock exchanges — investors should seek the advice of an adviser before acting on this idea. It is a high risk investment approach and not a sound strategy for everyone. However, for those that believe the market still has room to fall, you can take advantage of this and benefit from the market losses versus the gains.
At this time, investors should be going through their accounts to making sure they have enough low risk investments such as bonds, GICs, preferred shares, certain mutual funds or even high interest savings accounts to weather this recession. They should also continue to review their accounts on a regular basis to make sure they are comfortable with the risk, as it is important during these times to know exactly where you stand.
Remember, we are experiencing the worst crisis in our lifetime. Even the most notable conservative money managers such as Warren Buffet and pension fund managers are all taking large losses, some of them are down as much as 40 per cent. Thus there is no silver lining or magic investment that is going to keep investors from falling. Individuals should look to protect themselves and wait for the good times to come again.
If you have any questions regarding the above article or are looking for an Investment Adviser to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
