Archive for August, 2009

Stock Market Recovery: What to do now?

August 3, 2009


Stocks have bounced back sharply from their lows in March. YTD, the TSX Composite is up 20.5% and the S&P 500 is up 9.4%. July was the fifth straight month of positive gains with the TSX climbing 4% and the S&P 500 7.4%. From March to June, the TSX Composite increased 9%, 7%, 11% and 0% while the S&P 500 increased 9%, 9%, 5% and 0%. The cumulative gainson both indexes since March is an impressive 35%.

With their stock portfolios looking a lot healthier, investors might be wondering: what to do next? Without resorting to market timing, here are some suggestions:

Stay the course: Since short-term market movements remain as unpredictable as ever, the best course of action may be to simply stay the course provided investors have assembled a portfolio based on a well-thought out asset allocation plan and have plenty of savings set aside to tide over the inevitable surprises that life throws at us.

Rebalance: While stocks have rallied sharply, bond yields have improved somewhat (recall that bond prices move in opposite direction to bond yields) — 10-year bonds are now yielding 3.5% up from around 3.0% in March. The stock rally may have thrown many portfolios out of balance and bonds may now be less than target. Also, investors with unhedged exposure to US stocks will find that US stocks have not kept pace with other stock markets due to the depreciation of the greenback. Rebalancing the portfolio might mean bringing these two asset classes back to target.

Reconsider Risk: A number of investors rediscovered risk all over again in this bear market. Stocks have a nasty habit of falling sharply; often at the most inopportune moment and only long-term savings should be invested in the stock markets. Even then, investors may want to have a healthy percentage in bonds to reduce portfolio volatility. Now that stocks have staged a healthy recovery, now might be the time to consider if you are comfortable with your portfolio.

Personally, I’m regularly investing our savings buying more of the asset classes that are lagging. While it is tempting to make changes based on prevailing market conditions, more often than not, it is best to simply stay the course.