Investors should take heed of lessons from 2008 market meltdown say experts

MONTREAL – Investors who endured the white-knuckle stock market collapse three years ago should remember the event’s most valuable lessons: have a plan and don’t panic in the face of the current bout of extreme volatility, experts say.

“Invest with your head and not with your emotions,” says Peter Drake, vice-president retirement and economic research for Fidelity Canada.

Panic selling by weary investors around the world helped to cause markets this week to endure their worst tumbles since the crash of 2008.

For many, it seems like deja-vu, with France, Italy, Spain and the U.S. credit rating replacing Lehman Brothers, AIG and Fannie Mae in recent depressing headlines.

Declining stock markets were brought on by concerns about European sovereign debt, a U.S. government ratings agency downgrade and sluggish global growth. Most of those underlining worries persist, leading some to fear a rare double-dip recession.

The cocktail of uncertainties also has equity investors fearful. The CBOE Volatility Index reached the highest level since the depths of the financial crisis before retreating slightly. Investors have hedged their bets by driving up gold and silver prices. Others have fled the equity markets.

Serge Pepin, head of BMO Investments Inc., said markets may remain prone to “bouts of volatility” over the next while and that it could take some time until global economies are back on a sustainable path.

“While the headline market numbers may be alarming and to some degree discouraging… as investors we should all take a deep breath and remember that the fundamentals today are much better today than they were in 2008,” he said in a recent conference call.

Get weekly money news

Get expert insights, Q&A on markets, housing, inflation, and personal finance information delivered to you every Saturday.

Sign up for weekly money newsletter Get Started

By providing your email address, you have read and agree to Global News' Terms and Conditions and Privacy Policy.

Banks are stronger, companies are generally in good shape with loads of cash, less debt and quarterly earnings that surprise on the upside. In fact, banks are choking with so much cash that at least one New York bank has begun to charge clients who pulled their money out of markets and have very high cash balances.

“We take comfort in knowing that Canadian corporations are in much better financial conditions than they have been for several years, especially in this low interest rate environment,” Pepin said.

Consequently the ingredients are in place for mergers and acquisitions, share buybacks and dividend increases, he said.

While these types of market upheavals are difficult, they are not new and a well diversified portfolio will always win in these types of environments, said Pepin.

Bruce Cooper, vice-chairman of equities for TD Asset Management, said investors face a tug of war between miserable macro-economic factors and robust corporate fundamentals. He’s been steering clients to high quality stocks – big names that pay good dividends and which also have exposure to faster growing developing economies.

Among great consumer staples in the U.S. are names like Kraft (NYSE:KFT) and Pepsi (NYSE:PEP), which have strong global franchises, he said.

“Those kind of things will stand the test of time. Sure they’ll go down in markets like this but when the dust settles they’ll bounce back,” he said.

“This is not a time to speculate in low quality businesses that are not profitable where you’re hoping to hit the ball out of the park, but you could lose it all.”

The selection is more limited in Canada because about one-third of Canadian stocks are in the oil and gas sector, which will fluctuate with the strength of commodities.

While selling to reallocate assets is fine, Drake urges against running away from markets. He says investors who remained invested in a balanced portfolio of stocks, bonds and treasury bills throughout the last crisis into the recovery outperformed those who fled equities entirely to bonds.

But investment author Gordon Pape doesn’t quite see it that way, saying moving to the safety of fixed investments is key to preserving wealth in a situation that could be potentially worse than in 2008.

“There seems to be nothing standing between us and a full-blown recession or, dare I say it, depression,” he wrote in a newsletter Wednesday.

“Governments are tapped out – they exhausted all their resources trying to deal with the last mess and as a result they’ve become the problem rather than the solution.”

Pape believes the investors are in for “a tough, painful slog” and suggests investors take a fresh look at their portfolio and be comfortable with their holdings.

“Now it’s time to retrench, lock in some of those profits, and get ready for whatever the future may hold,” he wrote.

He advocates a series of fixed-income securities, including bond funds and ETFs that are sound and profitable. Many who are fleeing to safety have turned to government and municipal bonds.

Pape said most income trusts are sound businesses with good cash flows These include Inter Pipeline (TSX:IPL.UN), Pembina Pipeline (TSX:PIF.UN), Brookfield Renewable Power Fund (TSX:BRC.UN), Brookfield Infrastructure LP (TSX:BAM), K-Bro Linen (TSX:KBL.UN), and Firm Capital Mortgage (TSX:FC.UN).

He also advocates holding on to top-quality income stocks such as CN Rail (TSX:CNR), Bank of Nova Scotia (TSX:BNS), Canadian Utilities (TSX:CU), Enbridge (TSX:ENB), Emera (TSX:EMA), National Bank (TSX:NA), and TransCanada Corp. (TSX:TRP). But he’s more cautious about commodity-based investments, such as energy trusts.