The market volatility has been tremendous over the past week with the North American stock markets rising and falling 200 to 300 points in a matter of hours. What a ride.
More often than not during the past few weeks, the markets have finished the trading daysubstantially down, leaving many investors wondering what to do. Is this recent correction in the market of about eight to 10 per cent worthy of investor panic? Or is this similar to what we saw last year when the European markets sent the U.S. markets on a 17 per cent slide during the late spring and summer periods?
I think there is a misconception among individual investors that the U.S. is the main culprit for the downturn we have seen over the past two weeks. In my opinion, the U.S. certainly has its share of problems with a highly visible debt debate, high unemployment and a stagnant housing market, however the main reason for the most recent downturn comes from Europe.
The worry for the bond markets, which in my opinion set the tone for the equity markets, is that countries such as Spain and Italy will not be able to cope with their debts and borrow money at manageable interest rates to cover outstanding commitments. If countries like Spain and Italy cannot meet their debt commitments to other countries, then this would be a far worse scenario than smaller European countries like Greece, Ireland and Portugal not meeting their obligations. Therefore, the market is trying to price all these risks into its valuation.
While this is going on, investors have seen growth numbers in places like China and the U.S. faltering. This, in my opinion, clearly begs the question, are we in the midst of a global slowdown? Investors are wondering if this is a soft patch or a sign of things to come. In my opinion, when you see slowing growth and a possibly larger problem in Europe, this creates the type of environment we are seeing where volatility is at its highest.
My recommendation to investors today, with all the uncertainty and volatility, is to simply take a step back and not panic -- the worst thing an individual can do is panic sell. If you are a longer term investor looking for growth, then this can be a buying opportunity for the future. Investments in the equity markets, in my opinion, right now are on sale. If you are someone that may need your money sooner, then you should be more cautious. Perhaps you can look to other asset classes other than stocks or mutual funds, which do not fluctuate as much with the market. A person’s time horizon plays a big factor when it comes to navigating your portfolio during turbulent times. If you are an investor that needs to grow your portfolio and cannot afford to make less than five per cent per year to reach your investment goals, then the stock market is where you have to be. If you can reach your goals with a smaller return annually then you can start to consider diversifying into other types of investments.
If you have any questions regarding the above article or are looking for an investment advisor to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you.
Allan Small is a Senior Investment Advisor with DWM Securities Inc., a DundeeWealth Inc. Company. This is not an official publication of DWM Securities Inc. The views expressed are those of the author alone and are not necessarily those of DWM Securities Inc.