Investing lessons of 2000

Predicting the future is one of those no-win situations. If you get it wrong, everyone wonders how you could be so stupid. If you get it right, people say you were just stating the obvious.

The reality is that it’s extremely difficult to forecast with any certainty what the coming year will bring. There are always surprises, and 2000 was no exception.

The year started on a high note, with stock markets running strong, the economy in great shape, the Y2K bug vanquished, and everyone feeling optimistic following the emotional Millennium celebrations.

Now it’s a year later and the stock market is a wreck, there’s talk of a recession looming, and consumer confidence is plunging. What a difference!

Let’s look back at what I said a year ago in my first CBC financial commentary of 2000 and see how it all turned out — and what we can learn from it.

Never be greedy

At that time, I hoisted some stock market storm signals. I said that high-tech stocks were very, very expensive, and vulnerable to profit taking. My advice to investors who had made big profits was to put some of that cash into their pockets. I didn’t advocate selling everything I never do. But I did advise selling enough to cover your original stake. That way, you couldn’t lose money no matter what happened later.

1. That’s the first lesson to take away from 2000. Never be too greedy. My advice turned out to be right on target, and those that heeded it weren’t hurt anywhere near as badly when NASDAQ tanked.

But what I didn’t foresee was how deep the plunge would be. At the time I said to use any major correction as a buying opportunity. If you did that, you’re still waiting for the pay-off — and that may take a while, although it will come eventually.

Don’t rush to buy

Again, there’s a good lesson there. When markets are overvalued, the bottom can be a long way down. Don’t rush to buy at the first sign of a correction. Wait for events to take their natural course.

2. My second prediction for 2000 was a sharp rise in commodity prices, which would benefit our resource stocks. That turned out to be partially correct. If you had any shares in oil or gas stocks or energy mutual funds, you did well. But the rest of the resource sector was pretty dull.

3. Third, I predicted a rise in inflation that would result in higher interest rates. That would be bad news for most bond prices, so I suggested that you should be very careful with your fixed income investments. Real return bonds, which are indexed to inflation, would be the best bet in these conditions, I said. That turned out to be a good call.

As far as regular bonds go, I suggested holding back on investing in them until we saw some clear signs that interest rates were stabilizing and perhaps getting ready to drop.

That in fact did happen later in the year, and the bond market rallied as expected.

Bonds less risky

4. There’s another good lesson there. People often forget the excellent capital gains potential that bonds offer during times of economic slowdown or recession. Not only is there the potential for double-digit returns, but also bonds carry a lot less risk than stocks in such circumstances.

5. Finally, and here’s where I was way off base, I thought the Canadian dollar would strengthen to the 70 cent to 72-cent range.

All the classic signs for a stronger dollar were there — government surpluses, rising energy prices, a large trade surplus, a strong stock market that would attract foreign investment.

But as it turned out, none of the good news seemed to matter much. Not only did the loonie fail to gain ground; it actually fell in value over the year.

Hold some U.S. dollars

6. And that’s the final lesson to take from 2000. As long as the federal government does not view our low dollar as a serious problem — which it hasn’t so far — don’t bet on it rising.

You’re better off balancing currency risk by holding some assets in U.S. dollars — not for speculative purposes, but as a safety measure to protect your buying power, whatever happens.

With that, we close the book on 2000. But hopefully the lessons learned will help us improve our investing results in the future.

Adapted from a CBC Radio commentary.