The global economy has collapsed, the stock market is decimated, we are all going to lose our jobs, and the sky is falling! Oddly, none of the recent economic turmoil has scared me. In fact, when stocks bottomed out (presumably) a couple of weeks ago, I started buying shares. I’m not Warren Buffett [1], but I now own a couple hundred shares of GM, and twenty-some shares each of Apple, Microsoft, and RIM.
Am I crazy? I’m hearing of people selling their houses and buying gold, stocking up on tinned goods and toilet paper, and most of all desperately trying to convert any equity investments they have into or some kind of guaranteed investment. There must be something wrong with me that I keep feeling this strange compulsion to go buy more stock…
I don’t know whether my condition is poorly placed optimism, or whether perhaps I’m just more adept at perceiving things beyond the immediate than most members of the news media. Don’t get me wrong: I’m quite clear on the fact that we are going through a major downturn, one of massive proportions that is still sending shockwaves through industry. I am deeply angered and disgusted at the amazing lack of restraint and sickening greed in the financial and banking sectors that led the U.S. economy to its current downfall. And it is obvious that many innocent bystanders will be hurt by the economic collapse as their jobs and personal wealth disappear.
But I also feel that this kind of collapse, with different causes but the same basic result, has happened before. And every time the economy loses 30-50% of its “paper” value, a few years later it has regained that and more. The cycle is fairly short: less than a decade- if you look beyond the next year or two, a well-balanced equity portfolio will easily recover. During the downturn, it is possible to seize opportunities if you have some “free” cash, and certainly it is a poor strategy to sell off your equities once the collapse is already well under way. As I believe Warren Buffett said, “Be fearful when others are greedy, and greedy when others are fearful [2].”
I don’t expect to get rich from my contrarian investments, and my “naive” understanding of the markets means I will likely lose as much as I gain via my little stock purchases. I mean, I’m buying GM for goodness sake, and their quarterly losses are outrageous. It is just so hard to resist buying stock at a 50 year low… one eighth what it was trading for a year ago. But my “big” investments, our equity-based RRSPs and our house, have lost massive amounts of value in the last few weeks: probably 20-30%. Shouldn’t I be dumping as much of those investments as I can, buying stuff like GICs and the like? Sell our house and buy gold, and live in an apartment?
Not now… not with another couple of decades until retirement. That’s my thinking, at least. In fact, I just used a bit of our line of credit room to put more money into my equity-based RRSPs. I expect that my RRSPs will recover all of their former value within two years. Within 10 years, my RRSPs will be ahead of a GIC based retirement fund by easily 20%, probably more like 30% based on compounded growth. At some point, as we get closer to retirement we’ll shift some of our pension funds into GICs, but only when the cycle is high. It is an approach that makes sense to me, at least.
I guess if this post has a message, it is one of optimism. If you have or are losing your job, nothing “optimistic” will really help you- you’ve been hammered by circumstances beyond your control, and what I say here won’t help. I don’t doubt for a moment that I’d be whistling a different tune if I was about to lose my main source of income. But if your job is secure, and you have some money in equity based RRSPs, I wouldn’t start panicking. The market will come back up, and unless you have all your eggs in one basket you should be fine.
That’s my theory, at least. And enough doom and gloom! Get out and enjoy life, it is more important than the stock market or the short-term outlook of your investments anyway.