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The biggest ever headlines.

Investors are witnessing THE BIGGEST EVER stock market moves in history. And that means THE BIGGEST EVER headlines.

But lost in the headlines is perspective.

To October 15th, the Canadian stock market is still up 18% over five years. Include dividends and it’s averaged near 6% per year. Bonds averaged 5%. So an investor with the classic 60% stock 40% bond portfolio mix has averaged over 5%. Even with 1/3rd foreign content and a strong Loonie, five year portfolio returns are near 4%. Not bad despite the bumpy ride. (Remember Canadian stocks dropping 1500 points in a week last January)? The point is 4% beats -40%. Balanced portfolios work. Especially when it counts – through market corrections.

The headlines now predict a slowdown, recession or worse. But market corrections don’t cause slower growth. It’s the other way around. Global growth has been slowing and stock markets have been correcting for over a year. Not immune, commodities, the Loonie and Canadian stocks were performing well above average and this couldn’t last. While widely written about, this also got lost in the dust up.

Also missing from the headlines is the fact that bank stock prices hit bottom on July 15th. Since then, both Canadian and US financials are slightly up. Future troubles have been discounted into prices. The financial stocks that investors now own will emerge as beneficiaries with more market share and improved profitability. The competition is gone.

While the headlines continue to focus on the banks, the market has moved on to the fundamentals of the broader economy. So should investors. In the last 3 months it’s the cyclical sectors –energy, materials, gold – that are off 30% to 50%. The market is saying economic growth will be slower or worse.

Recall that earnings and interest rates drive the markets. Slower global growth means slower corporate earnings. But many corporations have strong balance sheets – those that did not leverage themselves like the financials did – and can weather future storms. (Calling for slower earning growth and a tougher environment does not sell stocks and is not a good career move for analysts. Thus earnings estimates have not yet been adjusted downward. Expect this to change shortly).

The $700 billion US bailout … er, economic recovery plan will be funded by selling bonds. As incentive to get investors to buy bonds, expect higher short-term interest rates.

Slower earnings and higher interest rates mean sideways markets at best.

How does an investor survive a sideways market?

Have a plan. Review your investment policy. Ensure you have the right asset mix. Balance is key. Broad and global diversification always works.  Reinvest interest and dividends. Dollar cost average purchases. (Some now. Some later). Rebalance. Be mindful of costs. (You are using ETFs by now aren’t you)? Expect volatility and have a rebalancing discipline in place to manage the ups and downs to your advantage.

Originally published in the Business Thompson Okanagan news, December 2008.

Doug Cronk CFA is Manager, Investments for a Canadian Pension Fund.

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