WEALTH Matters — FALL 2010

INVESTMENT MARKET COMMENTARY

The third quarter of 2010 saw reductions in global growth forecasts from most analysts, especially for the US and Europe. While these concerns initially weighed heavily on equity markets, those same markets were buoyed by encouraging earnings reports and other statistics later in the quarter

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The chart shows the Canadian TSX, US S&P500 and global MSCI World stock indices over the past year. The Canadian index reached a new post-recession high and the other two indices are again within 5% of their highs.

 

If you are thinking that the stock market has returned nothing in the past 10 years you are very close to being correct.

 

Why is the market seeming to go sideways? This is more the norm than the exception. Various studies have shown that the US market is ‘range-bound’ or stuck in a certain range of values, most of the time. The graph below shows these yellow range-bound periods covered 106 of the last 140 years!

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First, a competent portfolio manager such as a mutual fund manager or private equity manager can make money by buying low and selling high in volatile markets. You can also achieve the buy-low sell-high effect by re-balancing your  portfolio periodically between equities and fixed income, always back to your long term target asset allocation.

The second reason to hold equities is that a significant portion of the total return comes not from the market price, but from the dividends paid on the stocks. The bottom left graph shows in black bars how much the market price gain has been in various markets over the past 30 years. The blue bars show the contribution of the dividend yields. In most markets the dividends contribute twice or more what the price change does.

The third reason is that once it becomes clear that a new long-term bull market phase begins, it may be too late to benefit from it. Keeping a portion of your assets in equities at all times means you are ready to benefit from the next long term uptrend.

We can help you balance growth potential with safety.

So why invest in equities if the market is going sideways? There are three main reasons.

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