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moneysense.ca, 6/05/09
Stock Market Risk in two pictures
Risk tolerance seems an abstract concept until falling prices are actually experienced. Words and pictures cannot convey the feelings of fear and panic that rapidly declining portfolio values can evoke. I have no idea if the worst of the declines are behind us but with a significant bounce off the lows, here’s how the downturn that began with the bankruptcy of Lehman Brothers on September 15, 2008 looked like until it hit bottom (if it does turn out to be the ultimate bottom):
The TSX Composite fell a stunning 40% in a matter of two months, bounced off the lows, only to set another new low in March 2009.
The S&P 500 fell from 1200 points to 750, staged a rally until the end of 2008, only to fall back below 700 for a decline of 45%.
We’ll surely be hearing about the risks of not investing in stocks in the next bull market or how stocks have always generated superior returns over the long term. That may be true but only if an investor is prepared and able to navigate the short term, which could be rather choppy.
moneysense.ca, 6/05/09
Props for using logarithmic scales.
Now that you mention it, I should have used the Linear scale. Makes it that much more scarier!
If you’re an index investor, then it truly is a topsy-turvy market. But every stock picker knows that even in a bear market, you can always find a few examples of good businesses bucking the trend (going up).
For my own personal experience, I went into the market turmoil with a 60% allocation in stocks and 40% in fixed income which was exactly my target asset allocation. The market turmoil has devastated my stocks to the point where my allocation has shifted the other way – I’m now 60% in fixed income, 40% in stocks. So, when I set my emotions aside, I know in my brain that I want to increase my equity holdings in order to return to my target 60/40 equity / fixed balance.
I’m not so much of an index investor. My preferred method is to choose some well-managed, profitable companies who just happen to be traded down to a low P/E ratio. That’s what helps me to sleep at night. It would likely be very different for everybody else, that’s what makes us all individuals and everybody’s different way of thinking is what makes a market. But in my opinion, there is no better time to pick up SOME well managed companies at a CRAZY low P/E ratio… Many of my favorites are in the 5 range! And with Q1 reports coming out, these earnings DO factor in the collapsing economy!
I am with CC – logarithmic graphs are scarier and more effective for this purpose anyway
stocks are still cheap. Get more bang for the buck (more business bought for less money). I hope the market stays in the sh1tter for as long as possible.
CC: I’m not sure if you have another post planned – but a chart of Mar 6th to today could certainly be called “Stock Market Rewards”.
Sampson: You read my mind
Volatility cuts both ways — something investors tend to forget in the gloom of a downturn. Stocks could just as easily and just as fast bounce back as the past 8 weeks have shown.
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