October 2008

Now is a time for persistence

Market volatility has become a dominant and relentless theme. It is top of mind for all of us. The extremes have tested our patience, the complexity has challenged our understanding and the uncertainty has caused many to question what is a sound investment strategy.

Headline coverage has been unrelenting. Very simply, the cause of the current market instability can be traced back to U.S. subprime mortgages sold into an over-heated housing market. As defaults increased, the result was a choking of liquidity in world capital markets with swift and concerted efforts by central banks globally to inject stability and confidence back into the financial system. Investors and markets have re-acted with a see-saw of emotions. We have seen consecutive days of record downturns based on concerns of a global economic slowdown, followed by buoyant days of recovery.

If you have been following the developments in markets as they unfold, it has been a time of high emotions. We recall two "nail biting" weeks through September and October where day-to-day trading resulted in dramatic swings, but when measured from start to close over the entire week, markets were flat. This prompted one of our favourite commentaries on the issue entitled "Why I Only Read the Saturday Paper". There is a lot of wisdom in this perspective.

You have likely heard this before, but one strategy to envision the road ahead is to look back through history. Markets have always been cyclical in nature. Even though these cycles periodically exhibit extreme levels of volatility – such as the 1987 Black Monday crash or the technology bubble of the early 2000s – financial markets have proven to be resilient over time. Despite the short-term negative impacts of such extremes, in the long-term, steady economic progress has always prevailed.

Over time, the trend of markets has remained positive through a wide range of economic, social and political crises, rewarding the patience, discipline and persistence of those who continued to invest towards meeting their long-term financial goals. In fact, in each decade from 1950 to 2000, the S&P/TSX Composite Index has generated a compound annual return of at least 10%.

One of the great downfalls of any investment strategy is the belief that you can time the market. Here is a compelling fact: rising (bull) markets occur more frequently, provide returns of greater magnitude and last longer than falling (bear) markets. Indeed, from 1957 to 2007, bear markets have averaged a decline of approximately 26% and duration of 11 months; conversely, bull markets have averaged an increase of approximately 78% and duration of 32 months. This historic dominance of positive market conditions further highlights the value of remaining invested during periods of volatility, and resisting any urge to ‘time’ the market by either selling your investments or sitting on the sidelines waiting for an upswing. If you do, you are apt to miss the right timing either way.

Any seasoned investor will confirm that investing is a long-term proposition. However, even seasoned experts over the past quarter will have had brief periods where they doubted the fundamentals of sound investing during this mentally and emotionally challenging period. When faced with such obstacles, it is often worth looking to others for support. Warren Buffet recently penned an opinion for the New York Times discussing why he was shifting his personal portfolio to U.S. equities, and Burton Malkiel, the author of "A random walk down Wall Street", wrote a recent column in the Wall Street Journal making the case for staying invested.

One of the most important considerations for each of us is to ensure that we separate the messages we hear involving economic headlines and volatility across broad market indices versus the impact on our own portfolios. You will likely find the results very different. A sound investment strategy that focuses on diversification by its very nature dampens the overall level of risk. While the returns of all equity and balanced funds and portfolios have been negatively impacted by market volatility over the past quarter, ScotiaFunds's balanced funds and portfolios are built, diversified and managed to lessen the impact of negative market extremes, as well as to provide growth during periods of expansion.

Our objective in penning the thoughts behind this message is to confirm that this has been a difficult market and that any and all investors have been impacted. Emotions are high, but now more than ever, this is a period to stay grounded in investment fundamentals. The world economy will however adjust, and as this adjustment takes place, economies across the globe will grow, corporations will lever their opportunities in areas of competitive advantage, and investing for the long term will remain a core strategy for all investors.

Don't let emotions undermine a rational long-term perspective on investing. Ensure you continue to seek out professional advice and have clearly defined objectives and a plan in place that will perform across market cycles over the long term.

Thank you for your continued support of ScotiaFunds. We value your trust in us.

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ScotiaFunds are offered by Scotia Securities Inc., a corporate entity separate from, although wholly owned by The Bank of Nova Scotia. Mutual fund units are not insured by any government deposit insurer and are not guaranteed by The Bank of Nova Scotia. Mutual fund values change frequently and past performance may not be repeated.

Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments.  Please read the prospectus before investing.  The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.  Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.