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Don't Let Fear Drive Your Investment Decisions

Don't Let Fear Drive your Investment Decisions.pdf

Don’t Let Fear Drive Your Investment Decisions

“Fear is the foe of the faddist, but the friend of the fundamentalist.” – Warren Buffet

We wrote an article just last week about the Coronavirus and how pandemics over the past 100 years or so have tended to affect (or not affect) investment portfolios.   As equity markets have continued to fall since that writing many investors continue to raise concerns about their portfolios.  These concerns are perfectly legitimate and understandable.  You, as an investor have worked hard to put away hard earned savings, and you wisely wish to protect it.  But before doing anything rash, like selling out of your well designed investment portfolio and going to cash, let’s once again consider some facts.

Let’s start with how the equity market is doing.  Please note that for a lot of this discussion we will refer to the S&P500.

On February 19, 2020, the S&P 500 hit its most recent peak:  3386.15 at the close of business for the day.  As concerns over the spread of Coronavirus continue, there is also a developing concern about how it will affect global trade.   On February 28th, the S&P 500 dropped to a low of 2954.22, a decline of 12.76% from the February 19th peak.  In Canada, the S&P/TSX peaked on February 20th at 17,944.10, only to decline to 16,263.10 on February 28th, a drop of 9.37%.  It was a tough week. (Source:  https://finance.yahoo.com/quote/%5EGSPC/history/, and https://ca.finance.yahoo.com/quote/%5EGSPTSE/history?p=%5EGSPTSE)

The question is then, could things get worse?  Yes, they could.  They have before, so certainly they could again.  To gain some perspective, let’s look at some recent history.  Again we’ll use the S&P 500.

Date Range of Decline

Peak Value

Trough Value

Return

April 23, 2010 to July 2, 2010

1217.28

1022.58

-16.00%

April 29, 2011 to October 3, 2011

1363.61

1099.23

-19.39%

May 21, 2015 to August 25, 2015

2130.82

1867.61

-12.35%

November 3, 2015 to February 11, 2016

2109.79

1829.08

-13.31%

January 26, 2018 to February 8, 2018

2872.87

2581.00

-10.16%

September 20, 2018 to December 24, 2018

2930.75

2351.10

-19.78%

Source:  https://finance.yahoo.com/quote/%5EGSPC/history/

You can see from the above table, that what we’ve experienced over the last week of February 2020 is really no different than any one of several other market declines that have occurred over the last 10 years.  Having said that, this same decline did occur over a very short period of time (just one week), so what do we make of that?  What if we’re actually entering a bear market, with the Coronavirus being the catalyst? 

Bear Markets

Officially, ‘bear market’ is a term used to describe a decline of 20% or more in multiple broad market indexes like the S&P/TSX, the Dow Jones Industrial Average, or the S&P 500 over a period of two months or more.  In the table below, we’ll look at bear markets that have occurred on the S&P500 going back as far as the 1970s. 

Date Range of Decline

Peak Value

Trough Value

Return

January 11, 1973 to October 3, 1974

120.24

62.28

-48.20%

November 28, 1980 to August 12, 1982

140.52

102.42

-27.11%

August 25, 1987 to December 4, 1987

336.77

223.92

-33.51%

March 24, 2000 to October 9, 2002

1527.46

776.76

-49.15%

October 9, 2007 to March 9, 2009

1565.15

676.53

-56.78%

Source:  https://finance.yahoo.com/quote/%5EGSPC/history/

These numbers are a little more significant aren’t they?  On one hand, hopefully they help to put more recent events into perspective (i.e. the declines to date aren’t particularly significant).  On the other hand, could these market declines happen again?  The answer is, yes they could, and we have no way of knowing the timing of them, or what the catalyst could be.  If you are retired or nearing retirement, it is likely that this is an experience you’d rather not take part in; however, there’s good reason to pause and then stay the course.  As Franklin D. Roosevelt famously said, we have “Nothing to fear, but fear itself.”

Let’s take the bear market table we were just looking at and then add to it the recovery period after the decline.

Bear Market

Bull Market After the Bear

Date Range of Decline

Peak Value

Trough Value

Return

Date Range of Advance

Trough Value

Peak Value

Return

January 11, 1973 to October 3, 1974

120.24

62.28

-48.20%

October 3, 1974 to Nov 28, 1980

62.28

140.52

125.63%

November 28, 1980 to August 12, 1982

140.52

102.42

-27.11%

Aug 12, 1982 to Aug 25, 1987

102.42

336.77

228.81%

August 25, 1987 to December 4, 1987

336.77

223.92

-33.51%

Dec 4, 1987 to March 24, 2000

223.92

1527.46

582.15%

March 24, 2000 to October 9, 2002

1527.46

776.76

-49.15%

Oct 9, 2002 to Oct 9, 2007

776.76

1565.15

101.50%

October 9, 2007 to March 9, 2009

1565.15

676.53

-56.78%

March 9, 2009 to Feb 19, 2020

676.53

3386.15

400.52%

Source:  https://finance.yahoo.com/quote/%5EGSPC/history/

As you can see, each of the bear market periods is followed by a significant recovery period.  If you cashed out of your portfolio on the way down, not only would you have crystalized those declines, but you would have missed the timing when the market turned around and potentially have missed out on a massive amount of growth in your investments.  Remember it is very difficult to time the markets in terms of getting in and out of stocks.  You ultimately have two decisions to make.  When to get out, and then when to get back in again.  How many investors do you think were jumping into equities on March 9, 2009?  Not many.   We remember.  And yet, that was arguably one of the best investment opportunities of a lifetime.

Back to the Coronavirus

In our last article we spoke about the number of people that are being impacted by the Coronavirus and we wrote a lot about China (where the virus was first discovered).  Since that time it’s hard not to notice the panic that seems to be seizing citizens all over the world.  You just have to look at the media’s pictures of Costco shelves being cleaned out to realize there is real fear out there.

And yet, it would appear that cases of new Coronavirus infection in China are actually on the decline.  To date, there have been over 3,000 deaths globally.  In the US, as of this writing, there have been six.  Canada has still only experienced a handful of cases and no deaths.  None of these numbers appear particularly significant when you consider the impact of the annual flu season and statistical death rates in general.   Looking at the US for a moment, as of 2020, the US population is 331 million and they have an average death rate of 8.88 for every 1000 people.  This means that over 8000 people die every day in the United States.  29 million Americans have already had the flu this year and sadly 16,000 of those people have died. Of note, in Canada in any given year, the flu typically causes 12,200 hospitalizations and 3500 deaths.

(Sources:  https://www.worldometers.info/world-population/us-population/https://www.macrotrends.net/countries/USA/united-states/death-ratehttps://www.marketwatch.com/story/as-the-world-focuses-on-coronavirus-dont-forget-about-the-deadly-flu-2020-02-06,  https://www.ontario.ca/page/flu-facts)

The point of this is not to make light of the virus.  Being diligent with your health, handwashing, staying home when you’re sick, or simply being cautious in public, especially if you are an individual who could be at a higher risk from a respiratory illness simply makes common sense.  Our concern is that investors translate their worry about this virus over to their investment portfolio and take, what we might consider to be unnecessary precautions.  

Conclusion

We wanted to focus on the numbers at the start of this article so that you would have a clearer picture about levels of volatility and market declines that are the normal part of investing in equities.  To enjoy the higher returns that equity investing offers, one must go through certain periods of decline.  We are going through one of those right now, although there’s no indication that this will become a bear market yet.  It still might of course, but armed with this new information, we hope that you feel much better prepared to meet the battle head on.

And with that, we’ll leave you with one more quote from Berkshire Hathaway’s Warren Buffet:

“Be fearful when others are greedy and greedy when others are fearful.”

If you’d like to discuss this topic further or if you’d like us to perform a review of your portfolio in addition to your goals and objectives, please call us at (780) 426-2400, or e-mail us at gary.koss@manulifesecurities.ca  to schedule an appointment.

 


 

 Our Service Team

 

Gary M. Koss | Senior Mutual Funds Advisor

Manulife Securities Investment Services Inc.

Life Insurance Agent | LGK Wealth Management

Brandy Bolinski | Mutual Funds Advisor

Manulife Securities Investment Services Inc.

Administrative Assistant | LGK Wealth Management

Dakota Zaharichuk | Marketing Assistant

Lexy Koss | Mutual Funds Advisor

Manulife Securities Investment Services Inc.

Life Insurance Agent | LGK Wealth Management

 

Jennifer Hall | Client Services Assistant

Manulife Securities Investment Services Inc.

Administrative Assistant | LGK Wealth Management

Amanda Sinclair | Administrative Assistant to Lexy Koss

 

 

 

Our Office Address

 

 

Manulife Securities Investment Services Inc.

LGK WEALTH MANAGEMENT

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Edmonton Alberta T6A 0L4

Phone: 780-426-2400 | Fax: 780-423-0311

www.lgkwealth.ca 

 

 

 

 

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This publication contains opinions of the writer and may not reflect opinions of Manulife Securities Investment Services Inc.. The information contained herein was obtained from sources believed to be reliable, but no representation, or warranty, express or implied, is made by the writer or  Manulife Securities Investment Services Inc.  or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you. This publication is not meant to provide legal or account advice. As each situation is different you should consult your own professional Advisors for advice based on your specific circumstances.