When the Canadian recession was recently announced (economists recently reported the U.S. recession started a year ago), they were accompanied by doomsday rumours foretelling a depression.
“It’s not going to happen,” says financial advisor Jackie Ramler, of Raymond James. “As with everything, when you find yourself going into panic mode, you want to take a deep breath, take a step back and put things into perspective.”
Hearing the rumours and taking phone calls from alarmed clients, Ramler did some research.
“I want to call the media on pulling out one fact from a source and not putting it in context to the whole story, because the average person doesn’t have the rest of the information,” she says in frustration. “For example, there are media reports saying if the Big Three go under, we could lose 600,000 jobs. But it’s unlikely the Big Three are going to be let go.
“Bush has already said he’s going to deal with it in the short term, and Obama has said it’s not an option. But people are just hearing about the extremes of what could happen – we hear the news as if it’s done.”
To diffuse the panic, Ramler says she starts asking questions of clients who are afraid of losing everything. With a balanced portfolio, 50 per cent is in bonds and 50 per cent are top Canadian and international corporations, she explains.
“For a well-balanced portfolio to go to zero, it means the government has gone bankrupt and major corporations have gone bankrupt – so money’s not worth anything anyway.”
So she asks the questions.
“Are you going to stop buying toilet paper,” she asks and usually gets the laugh she expects. “Are you going to stop driving your car? Stop buying socks?” Most people say no, of course not. “Well, all those products are made by major corporations, so if you are going to continue buying them, and most other people are going to continue buying them, it’s unlikely they’re going to go bankrupt.”
Sure this is the worst market decline seen in 70 years, “but that doesn’t mean it’s the worst economy in 70 years,” she stresses. “That’s where the parallel has to be re-defined.”
In the depression-era U.S., 10,000 banks failed as opposed to 18 today, according to her research. Half (50%) of the nation’s homeowners defaulted (only 10 per cent have in recent years), and the gross domestic product (GDP) plunged 27 per cent. In 2008, the U.S. GDP has remained relatively stable and some are projecting it may be down four to six per cent in the early half of 2009. And, while unemployment then was at a lofty 30 per cent, it’s expected to decline up to eight or nine per cent next year.
In fact, she says, leading economists are already starting to predict better times ahead as early as next summer. Instead of panicking, then, she urges, don’t lock in current losses by selling out at the bottom of the market, just sit tight and wait for the inevitable reversal.
In the meantime, she suggests people recognize the learning curve Canada has been through since the 1930s and the programs that have been put in place to avoid a repeat of history. In addition to the CDIC, there is employment insurance, welfare and a host of other social safety nets.
This time around mortgage reforms, for example, have already been instituted to make sure the sub-prime fiasco doesn’t recur. Economic stimulants have been in play for months to mitigate the severity of the downturn we are experiencing now.
If possible, she adds, take advantage of the great deals available while the prices are still low. But don’t just take her word for it, she suggests. To further her point, she points to U.S. billionaire Warren Buffet, who is one of the world’s best-known and most successful investors.
“I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now,” Buffet has said. “What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
Ramler can be reached at (705-721-4947 for more information.