TORONTO (GlobeinvestorGOLD) -- Prior to last week, the S&P/TSX composite had never experienced a one-day drop of 800-plus points. As of the trading week of ended Oct. 3 we have had two now, with maybe more to come! Monday's dive was followed by a strong Tuesday rally although the rebound was nowhere near enough to make up for the decline of the previous day. It looked for a while like we might see a similar pattern on Friday after Thursday's plunge. But the strong morning gains began to erode around lunch time and by the end of the day the composite index had lost another 97 points. By the time it was all over, the Index had lost 1,323 points on the week (10.9 per cent) and was down almost 29 per cent from its record high of 15,154.77 in June.
The commodity sector, which had been the only thing keeping the TSX above water, virtually collapsed on Thursday as investors sold off oil, gold, copper, potash, and everything else that comes out of the ground. By the time the carnage was over, the S&P/TSX capped materials index had plunged almost 19 per cent in a single day. The gold index was down more than 16 per cent while the energy index fell 8.5 per cent.
Those are truly staggering one-day numbers. Clearly, investors were clearly in full panic mode. There was probably some forced selling by mutual funds and hedge funds as well. As redemption orders flood in, managers who don't have large cash reserves have to sell into a falling market to raise the money to pay off fleeing investors. That in turn adds to the downward spiral.
It's not surprising that I received many e-mails from anxious readers as the week progressed. Even those who had followed my previous advice and moved a lot of their money into cash and bonds were losing sleep. One member wrote: "Is this the end of the stock market or what? It seems like there is no end to downturns and even though you said to stay put and not get out when the market is plunging nobody seemed to have foreseen the severity of this. Could it be that as a result nobody will invest in the stock market for years to come and then it will stay like this for a decade?"
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. 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 sustained 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 per cent 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. Warren Buffett is out there snapping up bargains. Of course, he can get deals none of us can. That's what happens when you have billions to invest. There are certainly some good values out there right now. The problem is they may be even better values later.
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 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 adviser 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. I would rarely advise selling everything, especially at a loss. However, my philosophy is that health is more important than wealth. If you find that the gyrations of the market are causing you to lose sleep and your anxiety level is highly elevated, bailing out may be preferable than hanging on for the long haul – even though that would probably be more profitable in the end.
There is no point in second-guessing the past. The priority now is to decide what to do about the future and that call is a very personal one.
This article first appeared on GlobeinvestorGOLD.com. If you'd like to profit from the insight of more than 30 financial experts and columnists, including this columnist — sign up for a free trial to GlobeinvestorGOLD.com.
© 2007 The Globe and Mail. All rights reserved.
