In the game of football, it doesn't matter what the score is at the end of the first three quarters. It's the score at the end of the game that counts.
Financially, the markets continue to demonstrate extreme volatility. It seems they can't decide which way they want to go for an extended period of time so they just keep bouncing up and down. Let's take a moment to recap the first three quarters of the year
- The first quarter – World markets continued to climb in the first quarter. The momentum of the markets in 2003 pushed the Canadian, US, European and Asian markets up. In March, the market growth started to slow down. In fact, most world markets were in the red for the month of March except in Asia where the strength in China fuelled the booming markets.
- The second quarter – In the second quarter, most of the industrialized markets continued to show signs of strength. Market returns for the second quarter ranged from 0% in Canada to 3.1% for the MSCI World to 4.0% in the US and 5.0% on the NASDAQ. (All performance figures are in Canadian dollars). Investors were for the most part happy about their statements.
- The third quarter – And that brings us to the most recent quarter. Many equity investors will be getting investment statements that are showing negative returns for the quarter because stock markets around the world tumbled. The NASDAQ took the biggest hit with a 12.2 loss in the three months. The S&P500 lost 7.5% and the world index lost 6.5%. Canada was one of the few bright spots with a positive 1.9% return. This was fostered by strong growth in the energy sector. The fact is that a lot of the returns that were made in the first 6 months of the year were given back in the third quarter.
What to look for in the fourth quarter?
September statements have left a nasty flavour in the mouths of investors who look to the stock market or mutual funds for better potential returns. Coming off the last bear market, investors are wondering what does the future hold? Is the third quarter a sign of things to come? Are we headed for a bear market? Or was this just a little hiccup in the big scheme of things?
These are all great questions. The problem is that no one knows the future. Everyday, you will find a multitude of market experts in the news, in the papers, on the radio providing their thoughts for the future. Just remember that nobody knows what the future holds.
So that leads us to the next question: What are investors to do about all this volatility?
If you can't stand the heat, get out of the kitchen
I once had a client say this to me. It was a very valuable lesson. The fact is, if you can't stand the volatility and the short term uncertainty, then think hard about what you are doing and why?
For the entire period of the 1990's, investors moved mass amounts of money from guaranteed investments to the world of non-guaranteed investments, in hopes of better returns. For a long time, that was a strategy that worked. The lesson that the bear market taught us is that what goes up comes down and that risk is real. When investments go up, we do not really understand the true meaning of risk. Unfortunately we start to understand risk when it is too late.
Understanding financial compromise
With recent statements, investors can find themselves nervous again. Are you sleeping at night? If not, take a hard look at your portfolio and see if changes are necessary. The fact remains that risk is likely to reward in time but in the end there are no guarantees. Loss can be very hard on a portfolio and some do not have the patience to ride through the bumps. If that sounds like you, then it is time to review your portfolio. It might be time to overhaul the portfolio. If you don't know how to do that, then call a financial advisor for help.
Now, while this makes intuitive sense, I must throw in the words of caution. Making the portfolio more conservative (or less risky) can have certain ramifications or implications. For some, it might be a case of short-term relief for future long-term pains. For some people, the catch 22 is that they cannot afford lower returns resulting from lower risk. The big risk in being too conservative is not reaching your financial goals and in retirement, potentially running out of money. Herein we find the lesson of financial compromise. Everything we do has some element of compromise. If we buy that big screen TV today, we have less to save for the future. If we want higher returns, we have to accept some level of risk. If we save too little, we will have to spend less in the future. If we want to retire early, we may have to make some sacrifices to do so. I think you get the picture.
The key is to take time to evaluate you position both in terms of the short term and the big picture. Running out of the kitchen because it is too hot may not always be the best strategy. Take the time to contemplate all the issues before acting too quickly.