ARTICLES  &  REVIEWS

Noah

London Free Press

Although Noah listened to pounding rain for forty days and forty nights, he had to stay in the Ark with his family and a wide variety of animal species for almost one year. As investors, we have endured one thousand days of declining markets and now is not the time to jump off the boat.

 

In the last quarter, we saw the S&P/TSX index drop a whopping fifteen percent and that feels like getting hit with a tidal wave broadside after fighting stormy seas for almost three years.

 

However, selling your stocks and equity funds at four year lows to go back to bonds and GIC’s, which are at a forty-year low, might not be the wisest thing to do. The retail investor is always the last one out and always the last one in. The fact that the quarter ending September 30 has witnessed the largest exodus of equities to bonds and GIC’s could be the proverbial olive branch showing that the disgust with equities is nearing an end. According to a recent survey, seventy percent of retail investors do not understand the inverse relationship between bond prices and interest rates, that when interest rates rise bonds go down.

 

The S&P, TSX 60 Index is now off fifty percent from two years ago and the S&P 500 Index is off forty-four percent from March 2000. The Nasdaq is off seventy-five percent from March 2000. In hindsight, one wonders why there wasn’t more caution in 1999 and 2000 when price earnings ratio were so obviously high in hindsight and over-valued. There were a few Noah’s out there like Peter Cundill, Gerry Jarvasky, Jerry Coleman along with Brandes, Templeton and Trimark. However, as fear, hope and greed continue to move the markets it was hard in 1999 and 2000 not to get captured by the large performance numbers, and it was hard for people to buy the Noah fund managers who were underwater at that time, because of their strict value adherence.

 

Everyone has learned a lot about investment fundamentals over the last three years. Most are more willing to listen to the fundamentals of portfolio construction. The right thing to do is to not give up and flee to forty year low fixed income investments. The right thing to do is to have a properly constructed portfolio with a correct asset mix of cash, bonds and equities. The correct mix of management style, segmented by growth, value, deep value and growth at a reasonable price. The right thing to do is to be regionalized in your equities. A portion in Canada, America and internationally. The right thing to do is have the correct mix of small size companies under one billion, mid-size one to five billion, and large companies over five billion. To retreat to GIC’s and Bonds right now as your only asset class, will result in certain drowning. If a 5% GIC that is treading water is taxed at 2 ½% and receives 2½% inflation, the net return is zero. If you, in addition, to that, need a 4% income from your savings, you are guaranteed to lose your principal over time.

 

A properly allocated portfolio has cushioned the impact of a thirty-month bear market. There is quite a difference between having a disciplined portfolio approach as opposed to hand picking with no real plan, or moving to the treat of the week.

 

Models show U.S. equities are undervalued by 32% against government bonds. Viewed another way in the United States, it costs about $60 to buy one dollar of interest income for the next 12 months.

 

Go back and re-visit the allocations of your portfolio but resist the temptation to jump off the boat. Jumping off now will certainly mean that you will not see the rainbow. There is dry land ahead and the waters will recede. Markets do recover.