Yesterday morning, my husband and I found out something a bit unpleasant about one stock in our portfolio. Mind you, this is still in every way a great pick. The company’s balance sheet is strong, abundant with cash. It operates a sound business, pulls in record revenues quarter after quarter, and pays regular and generous dividends — the whole nine yards.
It’s just that half of that cash that I just mentioned ended up somehow tied up in mortgage-backed securities, managed in trust by the troubled Coventree, the company I wrote about last week. If you recall, Coventree had difficulty meeting its financial obligations, which sent shivers down many spines on Bay Street, including the company we are invested in.
But, by now, even my grandmother is aware of why our portfolios are shrinking. It’s just that after more than four years of surging, the stock markets have spoiled us. Even when a slump here and there snuck up on us, the stocks would have quickly made up for the lost ground. This time around, however, things feel differently.
And while most market analysts refuse to call what is currently happening a full-blown bear market, most are satisfied with the term correction, and a prolonged one at that. Interestingly, analysts are also saying that this correction was badly needed to force high flyers, speculators and excessive borrowers to smarten up.
So, what are investors that have been smart all along to do? In two words or less — absolutely nothing! There always have been and always will be market distortions, such as what has happened in the subprime lending sector. In nine out of 10 instances, these distortions would have resolved themselves without broad intervention from central banks. So, as the saying goes, this too shall pass!
But, I’m not saying that the healing process won’t hurt. In one of my previous articles, I mentioned that the S&P/TSX Composite has more or less wiped out nearly all of 2007 gains. Still, although you may feel an urge to sell, don’t! There is nothing worse then selling in a down market.
Instead, go back to the investment policy statement that you may have composed together with your broker. Review the original plan and reevaluate your risk tolerance and investment objectives. And don’t forget, in the falling market, there could be numerous quality stocks at bargain prices. Consider taking advantage of them.
My last suggestion in this article is to review your exposure to resource stocks critically. In the past four years, mining and energy stocks have generated spectacular returns. But, in addition to worries of the global growth slowdown due to the credit market meltdown in the U.S., many of these companies have dabbled in the credit market investments themselves and could be facing loads of trouble. Remember, the resource sector is extremely capital- intensive and limited access to cash is always considered bad news.