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moneysense.ca, 10/05/10
Investors need to calm down
Jon Chevreau recently wrote about black humour doing the rounds in the wake of market turmoil of the past week. He published a Facebook post by Hugh Cameron, a publicist and screenwriter and a former mutual fund company insider:
Changed my financial plan. Out go stocks and bonds. In comes lottery tickets and working with that Nigerian prince who sent me an email asking me to help him move his money. (I send him $1,000 now, and he sends me $100,000 later! How awesome is that?)
It is a bit distressing to see investors behaving somewhat like this trader crying out the live S&P futures in this audio clip that is lately circulating via email. If investors step back a little, they will realize that that the market swoon so far (even before the strong rebound today) is not even a blip (yet) in the strong market rebound since March 2009. As long as an investor has a plan and a portfolio that implements the plan, it is not worth fretting over every little squiggle in their portfolio value.
![[TSX Composite return. March 2009 to May 2010]](http://www.canadiancapitalist.com/wp-content/uploads/2010/05/tsx_composite_1_year_return.jpg)
moneysense.ca, 10/05/10
Actually, markets moving in the 4%+ range in any direction (almost 10% for the CAC40) on a single day does represent problems. This is not a little wiggle as it is pointing to profound uncertainty in the market. Markets moving at this magnitude have traditionally been very rare and are often associated with market crashes. Maybe not any more.
The S&P500 has a daily standard deviation of about 1.3% over any 5 year period you care to measure. So, today we saw a 3+ sigma event – that’s dangerous.Volatility clustering is a well known phenomenon in the market and right now things are pretty crazy. (Depending on the model, the S&P500 remembers the volatility shock for at least a month and is subject to larger than expected moves over that period. BTW, this is not technical analysis but an empirical feature of equity markest.)
Buy-and-hold is still the best strategy, but the Great Moderation is over – you can thank the greedy, lazy, baby boomer$ for that. Look forward to greater volatility over our investing life.
This is NOT your parents’ stock market!
I’ve decided that I’m going to start trading S&P futures with the guy in audio clip. I expect he will be dead from an aneurysm soon and I want his job.
[...] This post was mentioned on Twitter by Canadian Capitalist. Canadian Capitalist said: New Blog Post: Investors need to calm down http://bit.ly/crN5zk [...]
This is not a V shaped recovery guys, stick to the plan. If there’s panic in the markets don’t be the seller, be the buyer, in the long run you will be handsomely rewarded.
Avon Barksdale: I see that you are talking about quantitative finance: volatility clustering. Very nice.
I have to disagree with you that quantitative finance is different from technical analysis. To me, they are two sides of the same coin.
What is the difference between ARMA and SMA or EMA? To me, they are all the same with different parameter coefficients. SMA 200 has been used since the late 1970s.
ARCH/GARCH and stochastics are used quite a bit by technical analysts too.
I have a non-related question, please forgive me.
I’m trying to support green industries, and I do so by buying green technology stocks and (when I find them) mutual funds.
My question is, does this actually support green industries? Me owning stock from finavera renewables, does it actually help finavera in any way? I’m just trying to figure out if what I’m doing has any positive impact or it’s just a meaningless gesture.
Thanks,
@ioana
I don’t have an answer to your question, but I’ve read about “activist investing” recently:
http://en.wikipedia.org/wiki/Activist_shareholder
The idea is to hold investments and exert influence and pressure on the management of the company, up to and including replacing the management.
[...] Capitalist recently did a timely post about not fretting over every “little squiggle” in the market. Just to echo that theme as [...]
Is is a squiggle or a sinusoidal variation? As long as it is not an Orthogal departure we are ok…
Too many investors watching their portfolio in extreme detail. Stocks go up, stocks go down. That’s the way it works. Stay diversified and sleep easier at night.
@ioana
The answer to your question is: not really. Buying any company’s stock will put marginal upward pressure on the stock price, which will in turn boost a variety of valuation ratios that analysts use to rate the company as well as compensation schemes for management. But it terms of a direct effect on the company, trades in the secondary market have little bearing on the company’s fundamentals. An alternative way to “support” these companies (or any company, for that matter) is quite simply to buy their products/services.
@Avon: Perhaps it does. But, IMO, it doesn’t make any sense that a wholesale change of strategy is called for just because stocks are experiencing a stretch of volatility. A good plan should take into account the fact that stocks will fluctuate, sometimes wildly.
@Canadian Couch Potato: I don’t know if I’d want that trader’s job. I’d be having an aneurysm right away!
@Mich: It’s not a bad idea to buy during a panic but it is not clear to me that stocks are screaming bargains here.
@ioana: I concur with DM. The best way to show support for a business is to buy its products and services (at least for us retail investors).
Nice post. I too am always surprised by the reaction of people to quick smallish moves when compared to the long term trend.
I agree, it is tough to take a back look at the numbers but I remind my wife that our investments are long-term.
I have made a 40% return on my picks in 2009 so expectations were high, but I remind her that we need to build slow and steady.
Greece is just a blip. Check out a bigger crisis in 1997 – 98 with Asian countries in trouble, Russia defaulting on debt, LTCM collapse and yet the downturn is hardly noticeable on a graph of the S&P 500.
Similar to CanadianInvestor, I also believe that it’s a “race to the bottom” to see which country can print more money and devalue or inflate themselves out of their structural fiscal problems. Basically, it’s the lazy way out for countries like Greece, Spain, Italy, Ireland, the USA, Argentina, the list goes on and on… Why fix your budget problems when you can just print zillions of dollars and inflate your way out of trouble? The actions of governments the world over are only delaying the inevitable coming economic depression. But the longer they put it off, the bigger and deeper and longer lasting the next depression will be!
So what to invest in? In my opinion, we should look for an opportunity to get into the companies which will be the cause of inflation. Companies that provide the stuff which we MUST buy every day, such as food and beverage (including water), shelter and energy. The gold bugs would beg to differ, but when things go all to heck, I’d rather have plenty of meat & veggies and cold drinks in my fridge than gold bullion.
I totally disagree with you in this case. Investors need to throw a FIT so that these money making exchanges look out for the little individual investors like myself. I lost money from having a stop loss at $226 for Apple stock. By the time the stock sold, it went for $212. The stock traded at a little bit lower between 2:40pm and 3:00pm but then bounced back up to $240+. I was trying to do my due dilligence and make sure I don’t lose my money from a sudden market sell off but instead some kind of unexplainable computer blip caused this. Going forward, how am I supposed to be confident with my stop losses? If I owned significant shares of P&G stock, I would have a stop loss too at something sensible. Of course the markets have its limits on sensibility but it definitely crossed the line. Investors can’t be expected to account for computer blips. If I was at the supermarket and the POS system went down, would I be expected to pay more for the groceries than advertised?
@Phil: Amen to that. I read somewhere that the actions to cure the credit crisis is akin to trying to cure an alcoholic by plying him with more drinks. I think so too. But I don’t know if inflation will be a sure result of the printing presses working overtime. There is a school of thought that doesn’t rule out deflation – a la Japan of the past 20 years.
[...] Investors Need to Calm Down is a sentiment brought forward by the Canadian Capitalist but shared by many financial bloggers this week. A great caricature of this I remember from the day after the PQ first got elected in Quebec, drawn by Aislin, with Rene Levesque pointing to the reader saying, “OK, Everybody take a valium!”. [...]
What about precious metals? Gold & Silver prices have been steadily been going up over the last few years. Some analyst predict that gold could break the $2000 mark by years end and that silver could hit $30.