Market Watch 1998

Those gale force winds I wrote about in my last column turned into hurricanes that cut a devastating swath through stock markets everywhere. Not even the mighty U.S. escaped their fury. What’s more, I suspect it may be well into 1999 before they blow themselves out and de-stabilized and badly-rattled markets begin finding new valuation levels on which to start building anew.

Meanwhile, it has been an altogether different story in the fixed-income markets as investors rush to the safety of good-quality bonds. The spectre of economic slowdown and the spreading of a recession that has taken hold in one-third of the world increases likelihood of further interest rate reductions. Inflation at minimum, or even deflationary levels heightens the real-return attraction of bonds, even at today’s record low yields. Quality bonds combine safety with good value — and remain a good place to be!

This year, the first golden rule of successful investing can never have been more important; namely, to always have an appropriate portfolio balance between fixed-income and equities. Balanced portfolios have held up much better than those tilted too heavily toward equities which have borne the fl brunt of this latest storm. The lessons of prudence are obvious — be balanced, come what may.

Diversification, the second golden rule of successful investing, has also helped spread risks. This could have been achieved by dividing the equity sections of portfolios between different geographic regions; e.g. North America and Europe, rather than Japan and Southeast Asia. Or between different industries and sectors; e.g. not being overly-weighted in banks and financial services at the expense of resources and manufacturing. Or not being too heavily in high-P/E growth stocks vis-a-vis the cyclicals. Another hard-learned lesson of 1998 has been to never have too many eggs in one basket — diversify, diversify, diversify.

A further distinction — and lesson — of this tumultuous year has been the importance of investing in top-quality rather than secondary equities. Yes, blue chip stocks have been hammered too, but they’re still paying their dividends, they will stand the test of these difficult times, and they will come back — which may not be the case with the whole number of lesser lights.

Is it too late to sell at this beaten-down stage? No, not necessarily, because you will then be able to switch the proceeds into superior-quality and potentially-better equities also knocked down to fire-sale levels. Judicious switching could also trigger tax losses to soften future reckonings with Revenue Canada. Taking a loss in order to be better off later on is part of the blooding of all seasoned investors — this could be an opportune time to be “blooded.”

Most of all, however, this is a time to stand back from the “noise” of twitching traders and panicky professions. The detached reassessment of longer-term strategies that will then be possible will lead to the repositioning of portfolios for the rebound and fresh growth that will come as the markets climb the latest walls of worry — as they always have and once again will.

Hopefully, we have not needed to be distress sellers through the latest turbulence, meaning our “losses” are largely of an unrealized, paper variety. Nevertheless, I acknowledge the worries that an undoubtedly higher-risk environment can bring. So, to sleep more comfortably at night, you might also like to look into Segregated Funds, the exciting new investment products being offered by the life insurance industry, increasingly in partnership with leading mutual funds themselves.

Along with top-flight management expertise, “Seg” Funds combine a principal money-back guarantee after a specified period, usually 10 years, with the right to periodically reset the guarantee at the higher level to which a successful investment has been lifted. Because Seg Funds are classified as insurance vehicles, they also provide death coverage at the principal or higher market-adjusted level, as well as other advantages such as protection from creditors, avoiding probate and by-passing the estate. Considerable comfort in volatile times and markets. Not for nothing are Seg Funds catching on with the Canadian investing public in such a big way.

As another Tiger year — always the most treacherous in the all-seeing Oriental calendar — draws to a close, heedful investors should take heart. Priceless lessons have been learned and opportunities abound in deeply oversold markets. Our new and repositioned investment dollars will stretch ever farther as a result of the much-reduced “sale” prices for top-class equities. The great financier Warren Buffett put it succinctly at his recent annual meeting: “Only those who will be sellers of equities should be happy at seeing stocks rise; prospective purchasers should much prefer sinking prices.”

When the great equinoctial storm of 1998 blows over, we could all have benefited from this most timely of wake-up calls.