The halftime report 2001

Well, folks, it is halftime in the game of investing in 2001 and the bulls are losing to the bears but the game is not over yet. There were some bright spots around the world but generally speaking it has been tough for investors in the first 6 months of the year.

Around the world, only 5 of 24 national indexes are in the positive after the first 6 months. New Zealand has the biggest gain at 14.1%. Ireland is in second place with a 13.2% return. Australia rounds out the top 3 with a return of 11.4%. With the exception of Austria and Denmark, every other index is in the red. Finland was the worst with a loss of 39%. Canada was the 7th worst with a loss of 15.6% year to date.

Markets are moving together

Markets around the world are moving together more than ever. Historical research shows that geographic diversification is a key aspect of portfolio design. However, some experts feel that our world has become borderless which will cause markets to move in unison more than ever. A slowdown in the world’s largest economy (the US) has had a ripple effect all around the world. Countries and economies have become interdependent with increased world trade.

What about the different sectors?

In Canada, the TSE has 14 sub-sectors. What I found interesting is although the TSE was down for the first 6 months of the year, 9 of 14 sub-sectors made money. More sectors made money than lost!

The biggest winner was Transport at 26% in the first 6 months. On the other hand, Industrial products (where Nortel fits) lost 42.9% over the same period.

This was a year of flip-flop because the worst became the best and vice versa. At this same time last year, Industrial products were showing a year-to-date return of 34.0% and Transports were at a loss of 1.9%. At that time all sectors were showing positive returns with the exception of 4 showing negative returns.

Where is all the money going?

According to the Investment Funds Institute of Canada, to the end of June 30, 2001, $15.6 Billion dollars went into mutual funds this year. Almost half of all money going into mutual funds went into Money Market Funds. Global Equities attracted 17% of the money and Balanced funds hit the third spot attracting 9.8% of the money.

Interestingly enough, last year at this same time, Global equities attracted 85% of all investors’ money.

The moral of the story

I have said in the past that investors typically do the wrong things at the wrong time. This sudden attraction for money market funds highlights some important issues:

  1. Trying to time the markets. Most investors are parking their money in hopes of being able to get back into the markets when the environment improves. Unfortunately, the odds are against perfect timing and it will likely be another case of bad timing decisions.
  2. Short term nature of investors. We have heard over and over the merits of long term investing. The problem is not one of time but rather patience. History has shown that this is the opportune time to buy into equities if you have some investment patience. If you liked equities last year (remember 85% of all money went into equities), then you should love equities this year.
  3. Emotions rule the day. When markets are hot and rising, you feel excited, optimistic and even euphoric, but as markets climb the financial risk increases. As markets drop, you feel concern, fear and even depression but remember that when markets fall, the financial opportunity increases.
  4. Buying opportunities in the equity markets. I can’t stress enough what a great buying opportunity we are in, yet money markets rule the day. There’s really something wrong with this picture. Act with logic over emotion and remember there is something to be said about the contrarian way of thinking.

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