Why is the Stock Market Like a Yo-Yo?

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.

7 thoughts on “Why is the Stock Market Like a Yo-Yo?”

  1. I agree if you’re a long-haul investor not checkign the market everyday can do wonders for your blood pressure. Though it’s always a good idea to follow the companies you’re invested in to make sure they still fit your fundamental view, or in case something drastic has changed in the environment (eg. subprime mess and the financial sector)

  2. Hey Canadian-Dream,

    Just a reminder about the Canadian Tour of Personal Finance blogs.. I’ve got your marked down as a participant..

    I changed the date to Tuesday November 27, as I forgot about people watching the Grey Cup on Sunday.

    I look forward to your entry, and of course, please do tell all your readers about the event!

  3. I agree with you and in fact, really, what defines a bear market? I don’t think there is a cut and dry definition.

    I actually would like there to be a bear market because I know I will be putting a lot of money into the market over the next five years. I want to buy low, my dividend stream will comfort me always…

  4. A “correction” is 10% down.

    A “bear” is a prolonged period in which investment prices fall, accompanied by widespread pessimism (20%Plus down)

    So we have not yet even seen a correction much less a bear.

    My approach during bears and bulls is to always imagine I will keep each investment forever when I buy it. I then buy them and keep them.

    Then at times like at present (i.e. market is down, news is bad, o one knows) take a flyer on some things that look cheap. I even will use the margin in my account (i.e. leverage invest). BCE is my current extra play

    If things stay bad or get worse, well I will lose the interest on the margin loans and the capital losses to come.

    Bottom line – just keep investing evenly as you can for the dividend growth that will be the basis of your portfolio. Do this during bears and bulls.

    No one ever knows what is next and no one can predict.

    During times of rapid stress (examples – wars, 911, Oct 2006 Canadian Government attack on income trusts) just buy a little extra on the margin and wait for the “dead cat bounce”

  5. CD,

    Since 1982, the TSX has ended the year down 7 times (that’s 7 out of a 24 year period). It’s worst performance was in 1990, when it ended the year 18% below where it started.

    You have the right attitude in that, as young investors, we have to arm ourselves with the knowledge that markets do go down but earn positive returns in the long run.

  6. Xias,

    Good point. I follow the new releases for each company about once a week to see if anything really big has changed.


    Thanks for providing some numbers about a correction and a bear market. As to the margin, I did something similar recently and pick up a bit of BMO.

    Y Hat,

    Yes in general they go up. The trouble sometimes is waiting for the up part. *grin*


Comments are closed.