Dow: down 777.7 points (7.0%)
S&P 500: down 106.9 points (8.8%)
TSX Composite: down 840.9 points (7.0%)
It started off as a bad day as Wachovia Bank and two large European financial institutions joined a long list of casualties. When the markets closed the trading day, it was time to trot out the superlatives: the biggest percentage drop in the S&P 500 since 1987, the biggest percentage drop on the Dow since 2001, the biggest drop in the TSX Composite in eight years etc. and newspapers are already calling it another Black Monday. There was simply no place to hide in equities — among the stocks that make up the S&P 500, only Campbell Soup Company (CPB, up 0.32%) finished in the positive column. Bonds, cash and gold were the only holdouts in an otherwise ugly day.
When stock prices are collapsing, it is not easy to keep the faith in equities but times like these require wisdom and sound judgement such as that displayed in this memo sent by Dean Witter to clients on May 6, 1932, just months before the market bottomed (Source: Stocks for the Long Run):
There are only two premises which are tenable as to the future. Either we are going to have chaos or else recovery. The former theory is foolish. If chaos ensues nothing will maintain value; neither bonds nor stocks nor bank deposits nor gold will remain valuable. Real estate will be a worthless asset because titles will be insecure. No policy can be based upon this impossible contingency. Policy must therefore be predicated upon the theory of recovery. The present is not the first depression, it may be the worst, but just as surely as conditions have righted themselves in the past and have gradually readjusted to normal, so this will again occur. The only uncertainty is when it will occur….
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22 responses so far ↓
1 Blogging About Money // Sep 30, 2008 at 12:34 am
I know where you are coming from CC. You have to keep your head in this market. But you also have to ask yourself - if Congress isn’t acting in the best interests of their constituents (States-side) and are holding the world economy hostage (which it certainly feels like), how are we going to thaw out the credit freeze? Don’t you find it odd that they would simply walk away from the table without an alternative plan? Seems to me that they are just trying to save their seat for the next 4 years rather than saving a few million jobs or a few million homes for their country.
I’m of the opinion that you should never lose your head and sell out of good portfolio investments, or aggressively change your allocations - but in this market, I think you absolutely have to face yourself in the mirror and see if you can really tolerate this volatility. If you’re taking a beating and losing your mind in the process, you have to change your asset allocation for what works best for you the individual (not what your adviser or even what one of our blogs tells you to do - only you know how you really feel). The market is like a game of poker - this beating won’t end until all the weak hands are out.
2 The Buzz » Blog Archive » Keeping the Faith in Stocks // Sep 30, 2008 at 12:43 am
[...] … the biggest percentage drop in the S&P 500 since 1987 , the biggest percentage drop on the Dow since 2001, the biggest drop in the TSX Composite in eight years etc. and newspapers are already calling it another Black Monday . …[Continue Reading] [...]
3 Jon Kepler // Sep 30, 2008 at 2:25 am
I really thought this thing was going to get passed. CNBC sure was interesting today. Call me crazy, but I actually like Mark Cuban’s idea, which is to create an ETF and encourage people to buy. He posted the details here:
http://blogmaverick.com/2008/09/26/my-bailout-solution-im-in-for-at-least-50mm/
4 Bailout » Blog Archive » Keeping the Faith in Stocks // Sep 30, 2008 at 3:05 am
[...] When the markets closed the trading day, it was time to trot out the superlatives: the biggest percentage drop in the S&P 500 since 1987, the biggest percentage drop on the Dow since 2001, the biggest drop in the TSX Composite in eight …[Continue Reading] [...]
5 Four Pillars // Sep 30, 2008 at 8:40 am
I was surprised it didn’t pass.
I haven’t come close to panicking (yet)…
Great quote by the way - I have to read that book.
6 Bob // Sep 30, 2008 at 8:50 am
To be honest. Over the last 2 years, I was hoping and wishing for a severe correction in the market. Well it looks like I got my wish. Why? Because over the next 30 years that I have to invest it puts me in a great position to capitalize on it. In a perverse way, the bigger the crash the happier I am. I have faith that this could be one of the greatest opportunities to invest outside of the Great Depression.
7 Rob // Sep 30, 2008 at 8:52 am
I am sure this won’t be as popular a comment in this forum, but my heart is in the right place so I will leave it anyway.
All right you indexers out there, now is the time you have to sit tight and take it. You have be passive to invest passively.
Anybody can look back at, say, a 20-year chart and point to how the index outperformed this fund or that fund. But pointing to results on a chart and personally achieving 20 year results could not be farther apart.
I believe that only a handful of passive investors do what is necessary to achieve passive returns, and that is do nothing during these times.
Anything else (other than following a pre-determined rebalancing strategy) and you are an amateur active manager, and - please don’t kid yourself - they always underperform in a big way.
I know many people trying indexing suddenly realized they can’t do just sit tight. Many then become clients of advisors in the dreaded mutual funds, and (this will be really tough for passive investors to believe or accept) subsequently enjoy much better investment results for themselves.
I am not suggesting for a moment that active funds are immune from yesterday’s downturn, but simply that investors achieve far better results in the good ones.
The passive investment strategy is a great one, but only if you stay passive. If you have embraced indexing in the last few years, and you want it to work now, you have to be part of the small handful that will, in fact, sit tight and do nothing.
8 Steve Heath // Sep 30, 2008 at 9:25 am
Rob, I hear what you are saying, and as one of the newer indexers (just started investing in the market in December), I am down about 14% on average. Why 14% instead of 23%? Because I’ve been regularly buying all the way down, and will continue to do so as I can in the future (not to time the market, my purchases occur every time I hit $2000-2500 in savings, as that’s the point where it makes sense with the transaction fee).
But yeah, seeing my funds down 6-8% in one day was a bit disheartening… half of me because it will now be that much longer before I break even again, half of me because I don’t have another $2500 at the moment to buy more!
9 John // Sep 30, 2008 at 9:31 am
Rob, I think that experience, knowledge gained from reading a few good investment books, and networking with others on this blog have gone a long way to allow me to “smile and wave” during this storm. I am more confident in the passive approach today than ever.
10 Peter // Sep 30, 2008 at 9:33 am
What flabbergasts me is that no one from the media is grilling the CEOs of financial institutions around the world on why they failed to realize the benefits of the Basel II Accord after the FIs rushed to embrace the accord and implement it to the tune of billions of dollars. Those benefits include the following:
* develop a framework that would further strengthen the soundness and stability of the international banking system
* promote the adoption of stronger risk management practices by the banking industry
More details can be found here: http://www.bis.org/publ/bcbs107.htm
11 Dividend Growth Investor // Sep 30, 2008 at 9:53 am
I am pretty certain that a basic allocation to stocks and bonds will do pretty well over the next 3 decades. If they don’t.. Then probably aliens will be ruling the world and we’ll be in huge trouble anyways
12 Canadian Capitalist // Sep 30, 2008 at 10:12 am
BAM: Politicians will act in their best interests — i.e. getting re-elected. What do you think would play better in the campaign? Confessing that you held your nose and voted for an unpopular bailout and saying that you stood up to the administration and Wall Street and voted against the bill.
Leaving politics aside, this is precisely the risks of equities — they can go down in a hurry and fast. Unfortunately, many investors who thought they were “aggressive” find out what their risk tolerance is in bear markets. The ability to withstand risk is an very personal and investors have to figure this out for themselves.
Jon, Mike: At least we are not in John McCain’s shoes who took credit for the bailout one hour *before* it was put to vote. Oops.
Bob: Exactly! I’m investing for 2030, not 2010. And as long as capitalism works, the markets will do fine in the long run. If it doesn’t, like the memo says there is little else we can do.
Rob: I agree with you that now may not be the time to tweak the asset allocation and making it less risky. But, I do question if it is retail investors (whether passive or active) that are the ones that are losing their heads and panicking? Even if it is, is there any suggestion that passive investors are panicking (after all, bonds are holding up nicely, just as they are supposed to). In The Little Book of Common Sense Investing John Bogle points out that while index investors under perform their fund as well it’s not nearly to the extent that active investors do In fact, CNBC reported trader rumours that it was hedge funds liquidating to meet margin calls that was responsible for the bulk of yesterday’s loss.
Peter: Whatever the regulation, this won’t be the last banking crisis. Bankers forgetting to hedge risks isn’t new — it’s happened many times before and will happen again.
13 Jon202 // Sep 30, 2008 at 10:19 am
This market cleanse is good for the system. Eliminate the reckless and greedy management of investment banks and other financial institutions. Just as we complain about tax breaks for new businesses, we should as well for “bailout” plans for corporations. You can trumpet capitalism, then expect a social safety net when you’ve gambled it all, it’s one or the other.
14 Ben // Sep 30, 2008 at 10:48 am
Having added additional funds over the last couple of weeks (perhaps should have waited until this week), my index funds (Can Eq, Can Bond, US Eq, Int Eq) are all rebalanced to within 1% of their targets allocations. Riding the waves, whether they crest or trough.
15 Curt // Sep 30, 2008 at 11:58 am
If you can, I would move your investments to precious metals before the market tanks further in the coming days and months.
16 Canadian Capitalist // Sep 30, 2008 at 2:08 pm
dgi: Amen. Every crisis we can think of seemed never-ending at that time. We’ll get through this one.
jon: This isn’t the first “bailout” and certainly won’t be the last. The S&L crisis, LTCM crisis etc. were resolved only after the Fed got involved. The companies that were reckless are definitely paying the price. The common stock holders in Bear Stearns, Lehman, AIG, Fannie, Freddie etc. have paid the price with losses. I won’t argue for executive compensation — it is excessive and top management still gets buckets of stock options. Where is the outrage from the owners? Why aren’t institutional investors demanding accountability from their hired hands?
Curt: And you know this how?
17 Anon in Montreal // Sep 30, 2008 at 4:38 pm
The 1932 quote is interesting, but only applied to the USA. If you were a stock holder in Germany, France, etc. you got crushed.
This is why an all stock portfolio is never wise, even for investors who like risks. Bonds, real estate, gold, etc. all have their place and will protect you.
Unless of course total chaos ensues. But that’s what canned goods and guns are for.
18 Phil S // Sep 30, 2008 at 7:28 pm
I am sitting on about 35% cash & short term fixed income securities - but I managed to lose almost $20k of net worth on the 65% of equities that I DO hold back on Monday. Ouch!
Over the past year I’ve been using this opportunity to use my “new” money to build up a bond ladder (actually a GIC ladder, I thought they provide better yields than bonds & T-Bills). My bond ladder still under construction.
Last year I also completelt DE-levered my investment account. So, when I think we’ve officially hit “bottom”, or if we’ve bounced off the bottom and started the recovery, then I can use all of that credit to pour myself back into the market. I don’t think we’re there yet - I think there’s still more pain to come…
19 Canadian Capitalist // Sep 30, 2008 at 7:54 pm
Anon: True. Our personal portfolios are similar to the Sleepy Portfolio and are well-diversified between Canadian, US, EAFE and emerging market stocks. It also has some bonds and REITs.
Phil: It is amazing the amount of volatility we are going through. It is almost like a gentle stream (2003 to 2006) becoming a raging stream (2007 to present). You may be right about more pain to come, wish I knew!
20 mike at second opinions // Sep 30, 2008 at 7:55 pm
When the crashes arrive they are quick and scary, however no lessen is actually learned unless the recovery is a very slow one. Most recent “busted bubble” declines have been short term and have allowed the stock sellers to say they were just a speed bump. The 1929 crash had a 20 year recovery and the Japanese are in the end stages (hopefully) of a two decade recovery. So you had better have been well positioned going in, because this sucker has a few years left to run before the U.S. solves its real estate, debt, oil deficit issues…..and if the political leadership is as shown this week you might want to invest a little more in Canada!
21 Phil S // Sep 30, 2008 at 10:05 pm
To Mike. While the politicians down south of the border seem incompetent… Just look at the clowns that we have to pick from in our upcoming election! Oy vey!
I don’t think we can base investment decisions based solely upon politicians, otherwise I would be shorting the market for at least the next 4 yrs.
I base my macro-economic conditions based upon economic data such as employment statistics, GDP, consumer confidence, etc. I consider the macro-economic conditions when I go down to make individual stock picks or sector choices in ETFs. Right now, the macro-economic conditions look pretty bad, but that doesn’t mean EVERY stock will get wiped out. I keep searching for those hidden gems, but it’s very difficult to make a decision these days on which companies will defy the broader market. Like CC pointed out, out of the S&P 500 only Campbell’s Soup went up on Monday.
22 A Lap Of The Blogs : WhereDoesAllMyMoneyGo.com // Oct 3, 2008 at 12:16 am
[...] Canadian Capitalist talks about keeping the faith in stocks. [...]
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