Posted by Tim Stobbs on November 23, 2007
Sorry for the late post everyone. My computer crashed this morning and I didn’t have time to get this post up till now.
I spend a fair amount of my time ignoring the stock market. Really. The main reason is it drives me nuts if I look at it every day. So in my own defense I’ve gotten fairly good at ignoring the day to day changes, except when I go to calculate my net worth then I make note of the approximate current level. So when I saw the news last night and managed to see the drop in the markets recently even I was impressed by the drop. To illustrate my point here see this chart of the TSX index for the last year.
You might notice the out right away this is our second major drop for a year. So what’s going on? Well I don’t pretend to know everything, but a crude summary is the index is heavily made up of the banks. So when they hit hot water the index takes a dive. What’s more interesting to me is the pattern shift on the chart. Notice with this second dip we are not treading upwards anymore, but now moving sideways. This means over the next few months if this continues we will start to likely see people wondering if we’ve run into a bear market.
You see the issue is young investors (under 30) like myself have likely never held any investments through a bear market before. We typically didn’t start investing until after the dot com bust around 2000. So seeing a correction of 6% is a bit unsettling for young investors and then toss in the number of baby boomers looking to retire soon you will see a lot of nervous people selling stocks in a panic. This then creates larger magnitude swings than you would expect to see in the market.
So if we are going into a bear market what do we do? Well that’s easy. Keep to your long term strategy you have already picked out. Bear markets contrary to some people’s belief doesn’t mean a long term drop in the market. It rather usually means an increased period of volatility where is you average it out results in the market moving sideways for a while.
The point of a long term strategy is to keep you from doing dumb things with your investments in the long run. So next time you are feeling a worried remember, you don’t need this money for a long time so you can handle this dips or even a bear if it shows up.