As an investment professional, I’ve lived through four bear markets in Canadian stocks, counting the current one, which became “official” last month. Since the bear market of 2000-02, each one makes me think of Foreigner’s rock classic “Feels Like the First Time.” Reactions from the media, investors and financial advisors generally seem consistent with investors who have never seen a bear market before.
To make matters worse, many people are hungry for “what to expect in the next six to 12 months” type of advice. A little perspective can make today’s bear market – and future ones – a little more, um, bearable.
This bear market isn’t unique to Canada; many emerging markets have experienced sagging stock prices, but the decline became global recently.
Canada’s commodities-heavy market gave us a head start. This bear started in September 2014. Respected investors such as George Soros and Jeffrey Gundlach are bearish and have been for a while – but a recent research note from Royal Bank of Scotland (RBS) takes the cake.
In January, Andrew Roberts, RBS’ chief of European economics and rates, wrote a report urging investors to “sell everything … except high-quality bonds” because he foresees a repeat of the 2008 global market collapse on the horizon. His advice went viral, but it needs some context.
Although Roberts’ call is bold, it is not surprising. According to media reports, Roberts published bearish reports in 2010 and 2012, stating then that the economy was worse than during the Great Depression.
It’s interesting to consider the case of the so-called “PIIGS” nations (Portugal, Italy, Ireland, Greece and Spain) when they were flirting with default in 2012 and 2013. You could have concluded logically at that time that avoiding European stocks would be best. But you would have been wrong. Europe was among the top-performing regions in both 2012 and 2013, years that generally were positive for stocks.
Short-term stock market performance is impossible to predict reliably. There are many negative issues overhanging both the market and the economy – but that has always the case.
About a year ago, I struck a cautious tone myself. My column for Investment Executive‘s mid-November 2014 issue – Bear market education – urged you to start talking to your clients about bear markets.
The idea was – after a multi-year bull run – to remind your clients that bear markets have always been part of stock market investing and always will be. In having this discussion, your clients would be more prepared the next time the bear surfaced.
Yet, when the current decline registered on the bear meter, the reaction by too many media outlets, advisors and investors was as if this bear was their first.
But trying to control what is uncontrollable is not productive. Keeping a longer-term perspective can help. For example, I estimate that stocks and bonds currently are priced to generate annualized returns of 8% and 3%, respectively, over the next decade. That’s nothing to write home about, but that opinion isn’t going viral and won’t trigger any panic.
Also, staying diversified can save your assets. Canadian stocks lost 8% in 2015 and were down another 7% by mid-January. A portfolio that is 30% invested in Canadian stocks, 30% in global stocks and 40% in Canadian bonds saw total returns north of 4% last year.
The time during which Canadian stocks sunk into a bear market – September 2014 through mid-January 2016 – would have seen our hypothetical diversified portfolio gain by about 2%.
These are challenging times because no asset class is a screaming bargain. But designing portfolios that line up with clients’ goals, smart asset location, cost control, sensible rebalancing, transparent and robust reporting, and proactive communication will keep most clients from panicking and on track to meet their goals.
Dan Hallett, CFA, CFP, is vice president and principal with Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.
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