What to do now?

As the stock markets were going through another meltdown on Sept. 17, I received
a phone call from a Canadian Press reporter. What, he asked, would I suggest that
investors do now?

I know that seems like a century ago in the light of what has happened since,
but flash back for a moment to that day. The TSX had just plunged another 349
points to bring its loss for September to almost 1,900 points (13.75 per cent).
The Dow had fared even worse, dropping 450 points on the day. Stocks were sinking
faster than a ship with a holed hull and people were selling everything in a
rush to the lifeboats.

My response to the CP writer was to tell his readers to stop panicking and
take a deep breath. The stock markets weren’t going to zero. Quality companies
like Enbridge, TransCanada, Rogers, Shaw, and Fortis, just to name a few, were
not going to implode. Enbridge will still be delivering natural gas to your
home 20 years from now. Rogers will still be supplying cable TV services to
folks in eastern Canada and being paid very handsomely for it and Shaw will
be doing the same in Alberta. Fortis will still be generating electricity and
TransCanada will be carrying oil and gas through its pipelines.

Yes, Canadian banks and insurers have been sideswiped by events in the U.S.
but there is no comparison between their situation and that of Lehman Brothers,
Merrill Lynch, AIG, Fannie Mae, Freddie Mac, and all the other fallen American
icons. Royal, TD, Scotiabank and the others will be around decades from now,
unless the federal government some day decides to let some of them merge.

However, I did tell the CP reporter that people shouldn’t put their heads in
the sand and do nothing. Painful as it may be, investors need to take a long,
hard look at their portfolios. We can’t change the past but we can try to minimize
the damage going forward.

I pointed out to him that history tells us that big stock market losses are
always followed by a rebound, often a dramatic one. I said I expected it would
happen again this time, and reasonably soon. His story hadn’t even made it onto
the wire before my prediction became obsolete!

First, the U.S. government did an about-face and announced that it would save
AIG from bankruptcy at a cost of up to $85 billion. That was followed by news
of a number of extraordinary measures designed to end the liquidity crisis and
restore stability to the stock markets. Central banks around the world poured
$180 billion into the financial system. The SEC banned short-selling of financial
stocks. Money market funds were guaranteed. Administration officials sat down
with Congressional leaders to hammer out a comprehensive plan that would effectively
see the government buy up all the messy bad debts, thus enabling the banking
system to get back to business as usual.

Back in the old days, investors would have thrown their hats in the air in
celebration. Since hardly anyone wears hats these days except in the dead of
winter, they contented themselves with going out and buying stocks. And did
they buy! The TSX shot up a mind-boggling 848 points on Sept. 19, the biggest
one-day gain in its history.

By the following week, pessimism returned as Congress balked at the cost of
the bailout and the markets slumped again. Investors realized that even if the
banks are saved, there are still many underlying problems to be faced, not just
in the States but around the globe. Russia is spending billions to try to revive
its sagging fortunes. The boom in China is finally slowing down. Oil is moving
higher again. The rising U.S. deficit is likely to put downward pressure on
the greenback. That could revive inflation fears and eventually lead to higher
interest rates. We’re not out of the woods yet, not by a long shot.

But there will be surges of optimism along the way — investors are always
looking for excuses to exercise some irrational exuberance. When they happen,
use the opportunity to revamp your portfolio. Sell some stocks or funds you
were wishing you had disposed of when the markets were crumbling and build cash
reserves.

Of course, if upon review you decide that your portfolio is well diversified
with a good mix of bonds, cash, and high-quality stocks or equity funds, then
you should take no action. You’ve done your homework and put a plan into place
so stick with it. Over time, you’ll do fine.

However, if you determine that your portfolio is exposing you to more risk
than you are comfortable with, you need to create an action plan. Decide which
securities you want to get rid of and take advantage of any market bounce to
dump them.

This article originally appeared in the Internet Wealth Builder,
a weekly e-mail newsletter that provides timely financial advice from some of
Canada’s top money experts. For more information about becoming an Internet
Wealth Builder member, click
here.