On the Market's Recent Ups and Downs

September 1998

Feeling a little queasy lately? After the wild ride world stock markets have taken over the past several weeks, who wouldn't . We can probably expect more of the same for several months to come ­ so reach for the tums! The good news is, despite whatever impression you may have gotten from the media,there is no reason to be concerned. The world has gone through many troubled times in the past ­ the current worries plaguing financial markets today are no different.

Scary headlines like "Market Meltdown" and "Dollar Sinks To New Low" can rattle the nerves, but for the long term investor they do not convey any information of any consequence. Headlines are "just noise" says renowned stock-picker Peter Lynch. When the former manager of the Fidelity Magellan fund was asked his opinion on the recent drop in the market, all he had to say was "The world will be Okay" (The Globe & Mail, Monday, September 7).

Another great investor and a man of many wise words is Sir John Templeton. He warns that one should never forget the lessons of history. According to Sir John, "This time is different are among the most costly four words in market history". Bear markets are inevitable, he maintains, and it is not overly pessimistic to expect North American markets to drop as much as 40% from their peak. We are not there yet and we may never get there. What's important to remind ourselves is that these periods of uncertainty are par for the course. The upside is they do not last forever. Stock markets always recover and go on to reach new highs. In fact, this current bear market is likely to be very short-lived. In the meantime, you have a well-balanced, well-diversified portfolio designed to maintain its value as much as possible through all kinds of market volatility.

Investors who get burned in bear markets are those who sell at the bottom and then fail to get back in before the next upturn. Who ever recommended "sell low, buy high?" Conversely, successful investors are those who take advantage of market declines to add to their holdings at reduced cost. That's called "buy low and hold, then buy even lower if you can." For the long term investor, the "sell" part doesn't even enter the equation.

Sir John Templeton points out that if you are a net investor (i.e. you are buying more than selling) there is little cause to rejoice over increases in stock market valuations- rising prices only mean that you are getting less and less for your money. Funny how it can be so easy for us to forget this little bit of common sense. Investors, Sir John has also said, should never ask themselves whether or not markets are overvalued. Instead, they should "search all over the world for where they can find shares at the maximum point of pessimism? find the places where people are getting out; that's where your bargains are."

So what does all this mean for you? First, when you receive your quarterly statement in a few weeks' time, remember that unless you sell while prices are down, you have not lost anything. More importantly, if you are not retiring tomorrow, it matters little what your RRSPs are worth today. So give the bear a hug! Take advantage of the opportunity this market decline has created to add to your holdings. You will reduce the average cost of your investments and reap even greater rewards when the markets pick up again.