Rational Advisor

The TSX index traded in swings of more than 1% for 40% of all trading days in 2008 and the US S&P500 index traded in swings of at least 1% in either direction on 53% of the trading days so far. This makes the current period the fourth most volatile period ever, and the most volatile since the 1938 Depression era.

A lot of this volatility is due to the massive amount of mis-information made available to the average investor. Never before in the history of the world has so much information been available to the average individual, who must only supply dedication and a willingness to be rational. Something there emotions do not allow them to have. Many people think a portfolio shoudl be evaluated daily, they need tosee the price appreciation/depreciation daily. If you are trying to beat the other fellow on a daily basis, you are going to hit the “enter” key faster. it’s not new - markets have done crazy things over time. Human beings do things that are entirely irrational, such as i 1987, a998 and 2002. It’s a fools game to watch a portfolio daily.

All of this leads to large concerns for investors, a lot of questions and very little answers. However quite often when the markets are this turbulent, it is normal for investors to wonder whether or not it is time to take a different route. In most cases, if investors are invested in a prudent manner, based upon thioer long term objectives. It would be a mistake to do a hasty short term reaction, because these changes have historically led to weaker performance. In all likelihood the equity markets are more or less in a bottoming process.

With all of the bad news having been priced into the market, it is important for investors to keep in mind that by the time a recession is officially declared, the markets will likely have bottomed and begun their rise. Although it is difficult to watch, the best course of action is to revisit your risk profile with your advisor, and consider adding more.

How much of the recession is now priced into stocks? By the time employers are slashing jobs, (Citigroup just laid off 9,000) a recession is usually well under way. Since 1960, the S and P 500 has fallen an average of 7.8% in the three months leading up to back-to-back monthly job cuts. But six months later, the S and P 500 was higher five out of seven times for an average gain of 9.4%.

I don’t think you should panic, but at times like these, you should be very aware of what’s in your portfolio. Moving entirely to cash isn’t the right strategy, because then you’ll miss out on the bottom and what may be the best buying opportunity in the next decade. Instead, make sure that your portfolio is completely solid.

Overvalued investments, and hot managers are not going to cut it in this market. So, if you are chasing performance, just because a manager has had excellent five year results, you may be disappointed going forward.

Let me be clear, here. I don’t know how to predict the markets. I am not a market seer. I don’t know what the stock market will do tomorrow. (And, let me be equally clear, neither does anyone else.) Bad things may happen tomorrow. Certainly, bad things will happen on some days. I’m not saying that the things that were freaking people out a month ago were imaginary, or that they were real but they’re now gone away. In fact, I’m happy to tell you with some certainty that market volatility will continue. You can depend on that.

What I am saying, though, is that some patterns are shockingly predictable. The all to familiar financial disclaimer reminds you that past performance is no guarantee of future returns. And that’s true. But it should also say that you ignore history at your peril, for while it is lacking in guarantees, it is richly instructive.

Our human emotions are predictable

As I always say

‘we are irrational in very predictable ways”

History has taught us repeatedly that times like these are terrible for sellers, and delightful for investors. Markets often over react.

The thing of it is, stock market returns aren’t smooth and straight. You don’t get an average return of about ten percent a year by ringing up ten, ten, ten. You get it by taking two steps forward and one step back. You get it in lumps, all of a sudden. That’s why market timing doesn’t work (and, conversely, why people keep trying). So if you’re out of the market when it makes one of its typical yet unpredictable sprints, you won’t get the reward.

When that happens, it’s time to breathe into a brown paper bag and get back to the genius of investment basics. You get a good return by noticing that the day-to-day price of the market doesn’t have much to do with the real long-term value of the best companies within that market.

And you get an even better return than the market averages by never mixing up three very important facts: Extreme stock market pessimism is great for buyers, extreme exuberance is great for sellers… and stocks are long-term investments.

And if the market has gone down for the last 12 months, it is actually less risky to invest in than a market that’s gone up in the last 12 months.

This bear market will not – I repeat, not — last forever.

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