Traders work on the floor of the New York Stock Exchange (NYSE) on Jan. 6 in New York City.Spencer Platt/Getty Images
This week's rally in the stock markets has left investors breathing deep sighs of relief. After the worst six-week start in history, there is hope that we've come off the bottom and are on the way back up.
Fingers crossed that's the case, but don't hold your breath. The latest projections from the OECD have sharply reduced the outlook for the global economy this year and cut the projection for Canada to 1.4 per cent. If the forecast is correct, the market rebound this week may be short-lived, so let's enjoy it while we can.
The reality is that before this week's turnaround, the TSX had officially hit bear market territory, dropping more than 20 per cent from the 52-week high of 15,527.75 that was reached last spring. Just about every market sector was down. Only gold stocks, managed to buck the trend.
That means a lot of good companies were selling at bargain prices, but investors were too spooked to buy until this week. There was more than a whiff of panic in the air as fears grew of another 2008.
Conditions today are nowhere near as grave as they were then, but investor psychology and market momentum can create a perfect storm that can drive indexes down much more than rationality would dictate. That may be what we were experiencing – and it could return if the rally proves to be unsustainable.
A bear market is the most difficult time in any investment cycle and coping with it requires four qualities that are often difficult to muster in these situations. They are:
Prudence. Good portfolio construction is critical in these periods. The older you are, the higher the percentage of your assets that should be held in fixed-income securities like GICs, bonds, and the funds that invest in them. I have repeated this so often that everyone must be sick of reading it, but I don't apologize. Too many people still have a higher equity weighting than is prudent in their circumstances. If you're in that situation, start the rebalancing process now.
Courage. It's tough to stay the course when there is blood in the streets. The natural reaction of investors who see even big bank stocks tumble is to get out of the market at whatever cost. The result is often a fire sale of top-quality securities. The vultures love it! If you're really brave, add to your positions in quality companies when they're cheap.
Patience. If you've put together a portfolio you are comfortable with, this is not the time to tear it down. You need to believe in yourself and stick it out.
Optimism. Every bear market eventually ends and a new bull begins. It has always happened in the past and it will again this time, if it hasn't already. And when the new bull starts, it is usually with a bang – think 2009. Remember that if the daily red numbers start to get you down.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. Follow him on twitter @GPUpdates and on Facebook.
Gordon Pape