Since the beginning of the year, stock markets have gone through their share of emotions. Nonetheless, the TSX is now up 28% while the S&P500 and the Dow Jones are also up by 16.5% and 10%. So if you have a brilliant investment mind or you were simply lucky and you sold your shares back in July 2008; I hope you were as brilliant and put back everything in March 2009. Unfortunately, many investors pulled back their investments during fall 2008 and they are still waiting to get back into the market. Since stock markets have already surged, is it still the right time to invest?
Before we start to answer this question, let’s take a look at an interesting concept: getting your money back after a market crash. So let’s say you have $100 that you invested early in 2008. Things went sideways and you noticed that, at the end of the year, you had lost 40%. Since you now have $60 invested in the market and it is quite a small amount, you decided to leave all your money invested in the market. You thought you needed a gain of 40% to get your money back. It does sound right as you need a 40% gain to compensate for a drop of 40%, doesn’t it? Wrong!
If you take your $60 and multiply it by 1.4 (40% increase), you get only… $84! In order to get all your money back; you need the market to jump by 67%! Yes my friend, this is discouraging! But, there is good news… I promise!
There is still a lot of room for stocks to go up!
Every 5 to 6 weeks, we meet with a portfolio manager from our trading department or one of our external wealth management firms. About 3 weeks ago, we met with a VP (they all have neat titles 😉 ) from our trading floor. The guy is as sharp as a knife and I really love the way he presents his stuff; it was supported by facts and not intended to sell. Most of the time, they try to pitch an idea, an investment concept or even worse, they try to make a market prediction (a barrel of oil is going to hit $200… I mean $15… uhhh…$100?).
So, I was wondering if most investors missed the boat or is it still the right time to buy. The answer was very positive; there is still a lot of room. Whoa! That was easy to say for a guy who makes money if we sell his products 😉 hahaha!
Seriously though folks, I had a very specific question: As several investors have pulled back from the markets and placed their cash in money market funds, did they reinvest all their liquidity back into the markets since March?
This is when he showed us a few graphs showing the money market funds fluctuation (in term of total assets invested) for the past 10 years. We obviously see an abnormal amount in money market funds back in 2001-2002 and another big curve going up in 2008 (I really wonder why (sic)).
The second graph was more interesting; it was showing the amount of money market that went off the market and what went back in so far. Good news: There is still 2/3 of the money still sitting on the sidelines. The money is waiting on the bench like the worst player on a hockey team. He waits until the last minute to go in… when the game is just about over 😉
Considering the current Canadian economic situation and the amount of money market funds still pending, we have several good reasons to think that the 2009 market rally will now be called (take a deep breath before pronouncing this forbidden word) A BULL MARKET!!!!!!
So if you are still waiting to go into the market, I would suggest that you reconsider your position unless, of course, you only want to jump on the ice once the game is over 😉
image source: orvaratli
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