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.

This article has 14 comments

  1. I like how your advice at the market “top” is the same as at the bottom – stay the course.

    I too need to do some rebalancing.

  2. “While it is tempting to make changes based on prevailing market conditions, more often than not, it is best to simply stay the course. ”

    My problem with this almost universally accepted advice is: What happens when the unlikely occurs and the markets don’t recover?

    Why don’t more investors take out insurance on at least a portion of their portfolios?

  3. For investors who choose to own a fixed percentage of bonds, now is definitely a good time to think about rebalancing. After stocks rise quickly it’s best to be wary. Personally, my stock allocation will remain at 100% for long-term money, but for those who have an allocation to bonds, now is a good time to rebalance from stocks to bonds. Too many investors who claim to have fixed percentage allocations fail to rebalance at the exact times when it makes the most sense.

  4. I am still in the last category that you mentioned as I’m still looking at risk. In the March 30th issue of Canadian Business magazine, it shows that the USA still represents 77.6% of Canada’s export market (the next largest is the UK at 2.7%) and exports to the USA still represents 22.1% of Canadian GDP (the next largest is the UK at 0.8%).

    I know a lot of people like to say that growth in China and India will support the Canadian economy in the future, but the numbers simply don’t support that argument. China only represents 2.2% of Canada’s exports and India is lumped into “All Other Countries” because they are statistically insignificant.

    So, since we are so UN-diversified in our economy, we have to pay close attention to what is happening in the USA. In my humble opinion, the USA is totally screwed and things may be getting worse. The US government has legislated the Buy American clause if they want access to government infrastructure money, which is in effect a protectionist measure. The US is nationalizing GM and Chrysler – here in Canada we get to experience what kind of immense government waste exists in nationalized power utilities, just try to imagine what it would be like if tax dollars were supporting any consumer goods!!! Although they’re trying to extricate themselves from Iraq now, they’re still involved in two overseas wars and are spending billions of dollars each month to finance those wars, billions that they don’t have and are financing with debt… The USA’s trade balance has been completely out of whack for more than a decade. If it weren’t for the fact that they have the largest economy in the world and the greenback is the world’s reserve currency, they would be bankrupt by now.

    In my opinion, the only way that the USA can eventually get out of their downward financial spiral is to deflate their currency (aka. massive inflation). All of this protectionism, nationalization, deficit spending leading to currency deflation is going to be very bad news for Canada. We depend upon the USA for the health of our economy and there in-lies OUR risk. Despite the recent rebound in the stock market, I think we’re still going to be in for a wild ride in the future as everything slowly comes home to roost!!!

    That’s my global macroeconomic view. That said, it doesn’t mean that SOME businesses won’t continue to prosper. For example, people still eat and drink and need places to live and to heat their homes no matter how bad the economy gets…

  5. Is there any undervalued asset class right now?

    The only one that I can barely identify is natural gas and it is very difficult to invest in it.

    Any ideas?

  6. Well done on thinking for the long haul and buying up more- short term volatility is a pain in the butt, but even worse is when people try to second guess the market’s short term direction.

  7. Canadian Capitalist

    @Four Pillars: I’m simply rebalancing with new investments and not selling something I own. If emerging markets keep up their hot streak, I might end up selling some.

    @Mark: I haven’t read up or given much thought to the collar strategy that you advocate. I have a suspicion that capping the risk would mean capping the return as well, which may be worthwhile for certain investors.

    @Michael: I don’t think investor mood has swung from fear to greed just yet. Investors still seem to be anchored to the market peaks of the previous bull market and still think they are 30% down from the peak. But if this keeps up, retail investors would start piling in. I agree with your comment on rebalancing.

    @Phil: You may be right. One view holds that the current market bounce back can be attributed to the massive stimulus provided by Governments around the globe. However, as usual, I don’t have an opinion on whether the market is right or wrong but that the market’s guess is likely to be better than mine.

    @Henry: I think REITs and equities in general are still reasonably valued. Bonds, emerging market stocks are definitely not undervalued.

    @Jon: We can be sure of one thing — investors as a group are mostly wrong on market turning points. I don’t think this time will be any different, so the best course is to devise a reasonable plan and stick to it.

  8. I am thinking about buying Telus and Rogers, two representatives of the Canadian telecom sector. I prefer Telus and Rogers since their debt structure and management efficiency are better than Bell Canada.

    Telus is about 50% off its 2007 high and Rogers is about 40% off its 2008 high. Neither company rallied since March. I feel investment in such companies offer a margin of safety and reasonable return from both dividend and capital gains if the market continue to rally.

    @CC: You are right though. I think Jeremy Grantham argues S&P500 fair value around 950 and he says it is highly possible to touch 1100. If S&P500 touches 1200, S&P500 would wipe most of the loss from the Lehman crash.

    The technicals are bullish even though September and October are correction seasons.

  9. As an investing novice I can’t give advice on “What to do now?” but I have some great advice on what not to do, summarized here for your entertainment:

    -allow bank rep to advise you and spouse to hold in your rrsps high-MER, low-return mutual funds to pad his commissions
    -ignore nagging feeling throughout 2007 that you should reduce proportion of investments in equities – instead listen to bank rep about wisdom of buy-and-hold
    -watch market in fall 2008; kick yourself repeatedly
    -start reading about investing (e.g. canadiancapitalist!)
    -decide to shift rrsps to TD efunds – attempt this in late jan, 2009, watch bank rep wait to sell investments until early March
    -watch money sit in aether between BMO and TD until early May, while TSX climbs 30% from when you liquidated
    -bang head against desk; repeat

    Seriously, don’t do this. It really hurts, and I’m not talking about the head bruises. The worst part is that I wasn’t trying to time the market – just wanted a “lateral” move into some cheap index funds. Now we’re in cash and bonds because for the last two month’s I’ve been thinking “this rally can’t last, right?”. Guess what…

    Sigh.

  10. Yes, capping losses also involves capping risk.

    The question is: how much does capping those profits cost and is the investor willing to pay that amount?

  11. I have a hunch this rally will end with a large sell off – people taking some money off the table in hopes of recovering previous losses.

  12. Well I think it’s time for me to start re-balencing. I employed tactical asset allocation and slowly shifted from about a 60/40 equitiy/fixed income position ending with an aggressive 95/5 in March 2009. As a result of the gains made since then my portfolio is now at almost August 2008 value. It’s now time to start moving the other way.

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