Be cautious as markets recover
In the past year, we’ve come through terrorist attacks, the economy in recession, and the stock market plunge.
It’s hard to see how 2002 could be much worse, although anything is possible.
Most economists are growing more confident about the next 12 months, and investors are going along with them. There’s a growing belief we’re heading for a quick economic recovery.
What’s the outlook?
However, there are some naysayers. Unbridled optimism isn’t everywhere. Some economists suggest that we shouldn’t expect a turnaround until the second half of this year at the earliest.
A few don’t believe the skies will brighten until 2003.
However, we need to maintain a degree of caution, especially in the tech sector. The active buying right now is based more on hope than on reality.
Although some high-tech companies are sending signals that they’ve turned the corner, the sector as a whole is still depressed. And current share prices are running way ahead of likely earnings growth over the next 12 to 24 months, in many cases.
Be very selective
There’s no doubt that high-tech stocks have been terribly btered and in some cases oversold. However, the road to full recovery is still a long one.
Be very selective in the positions you take in the coming year. Don’t overpay. If you identify a security that you like, set a target entry price and wait for the stock to come to you. It often will.
Next page: Learn from history
Learn from history
As you’re planning your investment strategy for 2002, don’t lose sight of the lessons of history. Yes, the markets are usually leading indicators for the course of the economy, but they aren’t infallible.
- After the stock market crash in October 1929, the Dow Jones Industrial Average staged a big rally in 1930, an apparent signal that the worst was over.
Of course, it wasn’t. The Dow plunged 52.7 per cent in 1931 and continued its dive through the first half of 1932, until it touched a low of 41.22.
That was down 83 per cent from its position at the start of 1930 and off 89 per cent from its 1929 high. Clearly, the 1930 rally came years too soon and only served to lure investors back into stocks for a second round of huge losses.
Year ahead difficult
In some ways, the early years of the 1930s were like a hurricane. The Great Crash of 1929 was the front end of the storm.
In 1930, the eye passed over, causing many to believe the storm was over. Then came the back end, which always contains the strongest winds, and everyone was blown away.
Hopefully, 2002 will not be a repeat of 1931 and I don’t believe it will be. But I think the year ahead will be more difficult than many people expect, and that we will have our share of unpleasant surprises along the way.
Don’t sit on sidelines
However, this does not mean that you should sit on the sidelines. With money market funds paying record low returns, they are an unproductive place for your cash right now.
If you’re not convinced, check out the current yield on any money fund you own in the business pages.
Most of them are under 2 per cent. Many have fallen below 1 per cent, including such biggies as:
- Elliott & Page T-Bill Fund (0.67 per cent)
- AGF Money Market Fund (0.76 per cent)
- GGOF Canadian Money Market (Mutual units) (0.95 per cent)<
- Clarica Money Market Fund (0.78 cent).
Money market alternatives
U.S. money market fund yields are even lower.
- The Mackenzie U.S. Money Market Fund is down to a minuscule 0.32 per cent.
- By contrast, ING Direct is currently paying 2.75 per cent on their savings accounts.
If you don’t want to move money out of your portfolio, then consider short- term bonds or mortgage funds as an alternative to money market funds.
As far as the stock market is concerned, employ a selective approach, using a modified dollar-cost averaging strategy.
That means allocating a specific amount to each security you want to buy. Invest half the amount at the target price. If the stock pulls back on broad market weakness, commit more.
In short, be cautious but don’t be paralysed. There are exciting opportunities ahead, as well as some dangers.
The challenge is to take advantage of the first while avoiding the second.
Adapted from the January 7th edition of the Internet Wealth Builder.