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Investing

March 12, 2014

The best stock market lesson we’ve ever learned

Five years ago this week, Canada’s main stock index hit its post-financial crisis bottom. The smart money stayed invested.

North American markets opened on Monday, Sept. 15, 2008 with two ugly pieces of news. Earlier that morning, Lehman Brothers announced its plan to file for bankruptcy protection and Bank of America reported it would buy Merrill Lynch. The exhausted look in U.S. Treasury Secretary Hank Paulson’s eyes said it all. The financial crisis was on. 

Markets fell hard that first day all over the world. Then they fell some more. The S&P/TSX Composite index lost value steadily for six months. Its lowest end-of-day close came on March 9, 2009. Five years ago this past Sunday, Canada’s main stock index closed at 7,566.94. It was down 4,758.76 points -- more than 38% -- from its Sept. 15 opening.

U.S. stock markets fared worse. The Dow Jones Industrial Average opened on Sept. 15 at 11,416.37 and closed on March 9 at 6,547.05, a drop of almost 43%. The broader S&P 500 lost 46% during the same period.

Prime Minister Stephen Harper was on the campaign trail that Monday morning in mid-September. “There are and there will be difficulties in the world economy,” he said. And then this bit of prescience: “At the same time, Canada is not in the same situation as the United States.”

The recession that followed was less severe -- both in terms of negative gross domestic product growth and unemployment -- than the ones Canadians experienced in the 1980s and 1990s. We’ve seen low economic growth in the years since, but the Americans have had a tougher time of it.

It’s sometimes said that the best thing to do during a period of market volatility is to avert your eyes. Don’t read the newspaper; don’t check your investment account balance. What that really means is don’t sell in a panic. And to that extent it is good advice.

But financial crises teach us a lot too: about the importance of sticking to your plan, the value of dollar-cost averaging and the difference a good financial advisor can make.

Since bottoming out in March 2009, the S&P/TSX Composite index is up 88% as of Monday’s close. We’ve just had the best stock market lesson we’ll ever learn.

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