History lessons about the market

History, historians like to tell us, is a great teacher. Studying and observing the past puts events into perspective and can be a great way to understand what is happening today. Investors who have been pulling out their hair recently as stock markets rocked and rolled like a stormy ocean, and some economies teetered on the brink of default, can learn a thing or two from the past.

History, historians like to tell us, is a great teacher. Studying and observing the past puts events into perspective and can be a great way to understand what is happening today.

Investors who have been pulling out their hair recently as stock markets rocked and rolled like a stormy ocean, and some economies teetered on the brink of default, can learn a thing or two from the past.

“Investors have gone through a lot in the last 50 years, including numerous recessions and the real estate and technology bubbles,” said Andrew Beer, manager of strategic investment planning with Investors Group.

“This period of uncertainty is really no different than others. All market crises have one thing in common — they’re followed by a rebound and hit new highs.”

Over the last 40 years, for example, the S&P TSX composite index has experienced 13 negative calendar return years. With only two exceptions, the market moved into positive territory the following year.

Further, these gains were solidified with five-year double digit returns.

“Since 1956, the S&P TSX has delivered an annualized return of 9.5 per cent and has proven to be resilient through the worst market conditions,” Beer said.

“Over the same period of time there have been many instances when the TSX declined by more than 10 per cent, but each time the market recovered and achieved new ground.”

In down markets, investors’ first reaction often is to sell their holdings to stop the financial bleeding in their portfolios.

Unfortunately, this often is the wrong thing to do. Shedding investment losers only locks in your losses.

Remember one of the main principles of investing — time is on your side.

“Look beyond the short-term noise and remain focused on longer term investment objectives,” Beer advises.

“A move to cash may be viewed as a means to reduce investment losses, but it more likely means missing out on the early stages of recovery.”

For example, investors who lost faith and moved their assets to the sidelines in late February, 2009, would have incurred a significant loss by missing the rebound shortly after.

During periods of economic uncertainty, investors also may have the urge to flee to the safety of bonds and money market funds, but that may not be the right strategy.

During times of turmoil equities often out-perform other investment classes during the long term.

“During the recent downturn banks stocks have been beaten up a bit but have held their value pretty well and their dividend yields,” Beer said. “Bell Canada also has been extremely stable and held its value and there have been some good opportunities in industries that are well diversified. The last thing you want to do is to liquidate when prices are low.”

Many financial experts will recommend investors stick with quality, large-cap dividend-paying stocks and avoid equities which have high debt-to-equity ratios because if interest rates rise, so do debt servicing costs.

On the other hand, companies which generate an operating cash surplus and have little or no debt will benefit from the higher interest they earn on their cash surpluses.

Market turmoil can cause fear, which can lead investors to trade excessively and incur higher transaction and brokerage fees. The key is to stay calm and stay invested for the long term, which Beer defines as 20 years.

“Staying the course is of the utmost importance during periods of volatility as it ensures investors are able to fully recover from these periods and achieve their long-term investment goals,” Beers added. “This may be a good time for investors to re-visit and tweak their portfolios, but keep in mind that periods of market volatility are not unusual and are nothing new.”

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.