The merits of a long-term investment strategy still ring true!

There has been increased interest in the media and among business analysts and portfolio managers on the very divided issue of whether we are heading into a global recession or an economic slowdown.
In the past year, the North American stock markets have struggled, initially within the technology sector, but more recently, a broad-based weakness across industries is underway. The TSE 300 hit its high last September 2000, but six months later $350 billion has been wiped from Canadian investors' portfolios.

Many of you may be holding onto stocks in the hopes that they will make a comeback, others may be watching the value of your retirement portfolios decrease. With the explosion of the mutual fund industry, 49% of adult Canadians directly or indirectly owned stock last year, up from 36% in 1996. In February 2001, there was $412.7 billion held in mutual funds, a massive increase from the $50 billion held 10 years ago.

The following supports the “bull” rally argument:

1. In spite of the slowdown - unemployment is low, governments are working to pay down their deficits and tax cuts are either in affect, or planned. In fact, we may be in an environment where people are overstating how bad the situation is.

2. Investors must keep in mind that the stock market is a leading indicator. It predicts recessions and recoveries approximately 12 – 18 months in advance. Therefore, this slowdown we are experiencing now could be followed closely by a recovery.

3. The U.S. Federal Reserve and the Bank of Canada have indicated their willingness to help. The Federal Reserve has reduced the key rates four times since January 2001, and the Bank of Canada reduced the key rates by a further .25% on April 17.

This greatly enhances the probability of an economic soft landing and increases the likelihood of positive market gains for 2001. In the U.S., each time the Fed cut rates during the 1990s, the markets, on average, responded with double-digit returns over the following 12 months.

What defines a “bear market”? While few can agree on a definition, most would agree that bear markets follow great bull markets. The “bears” are predicting a sharp slowdown in economic growth until at least the late 2001.

In the U.S., the tightening monetary policy, higher energy prices and falling equity markets have squeezed consumer spending and business investment.

There are daily reports of steady decreases in corporate profits.

On Wall Street, the S&P 500 has lost 29% since its peak in March 2000.

While there is some agreement that Canada won’t suffer as much due to the tax reductions that took place on January 1, 2001, there is still much uncertainty.

In Canada, GDP is estimated to be 2.2%, less than half the pace recorded in 2000.

The Canadian dollar is suffering and the TSE 300 has dropped over 35% from its record high in September 2000.
In other words, not much good news.

As an investor, what can you do? There is no question that difficult markets concern us and create challenges for us. While most observers say that investors are responding pragmatically, it is difficult not to question our long-term financial goals and the potential risk to our investment portfolios. Key points to remember include:

1. Keep your expectations in check. Temper your expectations and learn to be satisfied with the lower returns that will be likely in the short-term future.

2. Ensure that your portfolios reflect your long-term goals of retirement, education planning, and debt reduction.

3. Maintain regular contact with your advisor, who can offer you well-researched and sound advice.

4. There are other financial considerations beyond one’s investment portfolio. Out of control debt, carrying credit card balances and excessive spending are some of the biggest obstacles to a sound financial plan.

5. Remember the sagest advice of all – diversification (industries, companies, countries and asset classes).

Finally, while predictions of a slow-down or at worst, a recession abound, you should keep in mind that periods such as these reflect the economic cycle, and that investors who stayed invested during the past fifteen years, including the downturns in 1990-1991 and again in the mid-90s, have been rewarded with annual compound returns of 10.63%.

There is clearly an emotional impact on you when markets drop and this is also a period when investors may be tempted to abandon their investment plans. The reality is that we don’t like losses and make emotional decisions when we see our portfolios decrease in value.

The fact remains, however, that while the 2000-2002 period will not likely generate the equity returns of the past, both the U.S. and Canadian governments have acted promptly to attempt to shorten the duration of this downturn. Combined with the absence of inflationary pressures and the efforts of corporations to reduce inventories, reflecting weaker demand, and the conditions should be in place to stimulate growth and economic recovery.

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