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Market Perspective

Written by: Sharon Alderson

Article Overview: September was a long and volatile month in the financial services industry and markets are taking most investors on a wild and sometimes frightening ride. The news about corporate failures and bailouts is confusing and the economic news is disheartening. That said, I wanted to remind you that we have a financial plan in place that assumed we'd hit rough patches like this eventually. People react emotionally to money and volatility, and this fact is not new.

Market Perspective

Throughout history the financial markets have gone through many tests of confidence. The misconception is that people feel that somehow the current correction is different from its predecessors. What we know from historical data is two things. First, when measured against all corrections since the end of the Great Depression, the current one would be considered average in size. Second, the prices seen at the bottom of any bear market are always higher than the bottom of the previous bear market. Did you know that the S&P/TSX index in Canada was 6,838 points on September 30, 2001? As of October 1st, 2008, the index was 11,714 points – a 71% increase!

History does repeat itself…

Decade Market Return World Events

1950’s 12.7% Korean War, US Seizes Steel Mills, Russia Explodes H-Bomb, Suez Crisis,
Recession, Castro Takes over Cuba.

1960’s 10.0% JFK Assassinated, Berlin Wall Erected, Cuban Missile Crisis, Vietnam War
begins, Mao in China, Newark Race Riots, USS Pueblo Seized.

1970’s 10.4% OPEC Crisis, Terrorists at Munich Olympics, Watergate, Largest US trade
deficit to date, Steepest market drop in 4 decades, Tangshan Earthquake
kills 240,000 people, American hostages in Iran.

1980’s 12.2% Interest Rates at all-time high, Worst recession in 40 years (Markets hit
new highs following year), AIDS discovered, Black Monday (DOW drops 22.6%
in one day).

1990’s 10.6% Y2K, Persian Gulf War, End of Cold War/Berlin Wall Fall, Oklahoma City
Bombing, Global Recession, Asian Flu, Mad Cow Disease, Euro introduced.

2000’s 6.2%
(as of Sep 15, 2008) Tech bubble burst, Largest market correction in Canada & US since the
Great Depression, September 11th, Enron, World Com, Iraq / Afghanistan
War, Credit Crunch, Income Trusts, Oil & Gold at record highs, Bear Sterns
& Lehman Brothers collapse.


Four things you need to keep in mind about Bear Markets

1. Bear Markets are an essential, immutable, constant element of the economic cycle. Human nature drives the economy, and the economy drives the stock markets. People tend to overshoot and then undershoot the long term growth trends of the economy. This type of behaviour leads to unpredictable returns in the market place which is precisely why markets earn high returns over the long term.

2. Bear Markets common. In the 63 years since the end of WW2 there have been 13 bear markets. These bear markets have averaged a decline of 29% and lasted on average 15 months. On the flip side, bull markets last on average 26 months and average +71%. I am very confident that the prices we see for common stocks in the market today are low and when the market takes off again, we will never see these prices again.

3. Bear Markets are a temporary interruption of a permanent uptrend. The advance is permanent over the long term and there is over 100 years of data to certify this.

4. Bear Markets are why equity returns are what they are. It is the volatility in the market place caused by investor behaviour which allows people to get wealthy over the long term.


When things are cheap we should think about buying them. You will need money to live during your retirement and the markets are on sale now. Don’t let the over-reporting of bear markets by the media steer you away from being a savvy investor.


What is the biggest risk?

Your biggest financial risks are 1) being under-insured, and 2) outliving your money. Consider the impact of inflation for instance. If inflation runs at 3% for the next 30 years it will cost $2.42 to replace a dollar today. If you want to pay yourself $70,000 per year in dollars today that means you will need to be paying yourself $169,900 in 30 years.

Undoubtedly, in markets like these you will meet people, family, and friends who have been left out in the cold during these difficult times by their current advisors. Studies show that 35% of clients do not hear from their advisors when markets go through a correction. If you have found this helpful, please forward this information to your friends and family.

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Article Tags: economic news, investors, market perspective, money
Referred by: http://www.womenforwomen.ca



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