Financial Planning, Investment Counselling, Tax and Accounting

What a Difference a Year Makes

As we sit basking in the afterglow of our Winter Olympics enjoying the above average March temperatures, and below average number of winter snowstorms, it may be difficult to force ourselves to reflect back to where we were this time last year.

We were recovering from the aftermath of a long and difficult OC Transpo transit strike that paralyzed our City for weeks. Although the strike ended in late January, the transit situation did not return to normal until the end of March. This situation was made that much more difficult due to a significant number of winter storms.

The stock market had also been in turmoil for months, with many prognosticators predicting another Great Depression. The carnage in the stock market started in the fall of 2008, and showed no sign of abating in the early months of 2009. Investors shuddered when they opened their monthly or quarterly investment statements.

Well, the prognosticators were wrong – and the fear of another Great Depression proved to be unfounded. For those of you that like to track such events, the actual “market bottom” happened on March 9, 2009. This date marked the turning point as a solid market recovery took hold.

During the ensuing twelve months, the markets were able to digest all of the events that had unfolded over the previous 9 months, and in some instances, continued to unfold. Sober second thought soon replaced the panic and fear that had driven the market sentiment for many months. Investors started to realize that although some serious damage had been done as a result of the collapse of the US housing market and the failure of some large and well established financial institutions – the sky was not falling - and quite possibly the market reaction was overdone, and that just maybe “the baby had been thrown out with the bathwater”.

Investors that were able to keep their wits about them during the market mayhem have now been handsomely rewarded. The simple strategies of 1) staying the course, 2) rebalancing the portfolio even in a down market, and 3) the good old fashion strategy of “buying low” have once again proven to be the best strategies.

Markets have now recovered significantly from the low point on March 9, 2009, and in some instances as much as 60% or 70%. While this is not an indication of expectations going forward, a consensus is building that the market recovery is sustainable, and that 2010 should be another positive year in terms of market performance.

Today, the market is somewhere between absolute pessimism and euphoria, and many investors can be characterized as extremely nervous.

As a general rule, a certain level of nervousness is positive. What gets investors in trouble is an excess of either optimism or pessimism. While today’s mood may be erring on the side of being a bit too pessimistic, we think that being cautious in the current market makes sense, provided that prudent caution doesn’t cross the line into panic.

The good news is that there are still excellent opportunities for investors who are prepared for short term volatility. We spend a lot of time listening to the best market minds and to money managers who have lived through multiple cycles. We are reassured that most say that they are still finding very good value—not to the extent that they did earlier this year — but still well ahead of that they would have seen a year ago.

While markets have not yet recovered to the all-time highs that were set in mid-2008, we can all once again sleep well at night knowing that the sky is not falling! And you should look forward with anticipation to opening up your next investment statement.