With the recent sale (i.e. stock market correction) on the best companies in the world, investors with money to invest are trying to time the bottom by waiting until things clear up, or they are biding their time buying GICs to play it “safe”. This is not a new phenomenon, and the financial industry will gladly develop products that cater to your fears, just like they did in 2009 and also in 1987 when Chase Manhattan Corp. launched a certificate of deposit (CD), which is similar to a GIC in Canada, with a return tied to any decline in the S&P 500. If the broad stock market fell 10% over a year you would make 10.5% on your 12-month CD, and since investors were worried about subsequent declines after the shock of the 32% selloff in September 1987 (yes you read that right, minus 32% in one month) the appetite was strong.

The only problem with such an investment is that future returns are typically better after significant sell offs, not worse, as the best companies in the world are better value after a sell off, which is counter intuitive to many investors. All else being equal, if the price of a great company goes down its value goes up – you are getting a diamond for the price of a cubic zirconia! Unsurprisingly, as shown by the chart below, the US stock market proceeded to double over the five years after the 1987 sell off, not only recovering the 1987 losses, but making new highs.

The key to managing emotions is to think less about the next 10 to 20% move down or up, and instead focus on the next 5 to 10 year move that history shows will most likely be up. By doing that we think sticking to your plan is simple, keep your near-term needs in cashable and liquid GICs (or some other liquid cash equivalent) and invest your long-term money in great companies that have a history of growing dividends and earnings. In 5 to 10 years you will be happy you did just that, even if you did not find the elusive stock market bottom.

Randy and Ian