In the old tug-of-war between hope and fear, fear is gaining again as investors glance back nervously at the 2008-2009 financial market meltdown.
"People are really still on edge since 2008," says Craig Machel, a vice-president and portfolio manager at Richardson GMP in Toronto. Many investors are that much closer to retirement and can't afford to go through the pain again, he says.
Their jitters would appear to be justified. Stock markets have been rising for six years. Political and economic turbulence abounds. Could the recent stock market crack be signalling another big drop?
At least one prominent market watcher thinks so. Stock markets today are "like a 90-year-old trying to run a sprint up a mountain," Mark Cook, of Mark D. Cook Advisory Services in East Sparta, Ohio, said in a recent BNN interview. "They're not going to be able to do it for much longer."
Mr. Cook's proprietary indicator correctly called the 1987, 2000 and 2007-08 market plunges. The longer the bull market runs unchecked, the deeper and longer the correction will be, Mr. Cook says. Based on his indicator, the situation now is "more dire" than the one preceding the 2007-08 market crash in which stocks lost half their value.
Marc Henein, an investment adviser at ScotiaMcLeod in Mississauga, has been telling clients to take some gains off the table for some time now.
"We've been quite aggressive with selling over the past few months because we believe the markets are due for a pullback," Mr. Henein said in an interview. His strategy is to "sell the gains" on stocks that have done especially well and invest the proceeds in money market funds or short-term guaranteed investment certificates. The original stock position remains intact.
This has the effect of locking in the gains, protecting clients' capital and "slowly tilting portfolios to become more conservative," Mr. Henein says. "The point I want to hammer home is that markets go down much faster than they go up."
The adviser emphasizes that he is not trying to time the market, a strategy that fails more often than not. "We're not running for cover with the entire portfolio." He is targeting the energy and financial sectors, which have gained strongly over the past few years. "The party can't go on forever."
Mr. Henein is not a doomsayer. "I believe stocks could go down by 10 per cent but end the year higher," he says. So the very stocks on which he is crystallizing gains now could be returned to clients' portfolios a few months hence. "It's the right thing to do given how the markets are going."
Proponents of the traditional buy-and-hold strategy point to the costs of such an approach: trading commissions, and, in taxable portfolios, the triggering of capital gains tax. If you don't need the money any time soon, just turn away from the scary news and leave your holdings intact, they argue. Mr. Cook, in the BNN interview, said the prevalence of the buy-and-hold mentality forewarns that a correction is imminent.
Mind you, investors won't make much on money market funds and GICs, a point Mr. Henein readily acknowledges. Money market funds are paying 1.25 per cent, while cashable GICs pay 1.4 per cent. But to him, it's a matter of having some cash to take advantage of buying opportunities in the not-too-distant future.
"Fall is traditionally weaker, so shoring up cash gives us the opportunity to jump back in."
Other advisers point to the need for portfolio diversification beyond what can be offered by stock markets and traditional fixed-income products such as bonds and GICs.
To Mr. Machel of Richardson GMP, the question is how investors can remain invested and still make money. He finds effective diversification in investments that are not closely correlated to major market indexes – and where gains are "repeatable and meaningful."
Investors are "moving to strategies that are going to get them returns of 7 or 8 per cent a year that are not tied to the stock market," Mr. Machel says. For him, alternative strategies such as mortgage funds and securities backed by assets or receivables fit the bill.
In the stock market, performance can swing from huge losses to equally huge gains, he notes. "This is a pretty big gap."
The goal is to narrow it to zero. "Yes, you give up some of the highs, but you are well and truly reducing the lows," Mr. Machel says. "You are going to compound your returns more successfully."
The equity part of investors' portfolios isn't the only weak spot. Bonds, too, have been volatile lately on fears that interest rates could suddenly rise, spurred, perhaps, by rising inflation. People invest in bonds for income and to reduce volatility, Mr. Machel says. Bond yields are still historically low.
"It's a losing game at the moment because you don't make any income and losses can accumulate pretty quickly."
With the alternative investments Mr. Machel favours, he says "the risk of capital loss is very low." Investments such as mortgage funds offer an attractive income stream plus a hedge against inflation because with a lag, they can charge their customers more for loans as market interest rates rise.
What about those blue-chip, dividend-paying stocks investors have been clamouring after for the past few years? For many investors, it may well make sense to hold onto them, but Mr. Machel sounds a note of caution: "Valuations on many dividend-paying stocks are stretched really high," he says. "Like the housing market, people think they will just keep rising."