Newsletter – March / April 2011 – Risky Business

Risky Business

Baby boomers got dream-creamed in the 2008/9 stock market crash. Their blue chip stocks dropped 45% on average – the juniors dropped even more. These are the same investors whose Wealthy Barber’s Buy and Hold approach drove the stock markets up, up and away in the 1990s. Their long range financial plans called for compounding returns of 7% or 8% so they could retire rich, like Warren Buffet. The 1990s mutual funds craze lulled a whole generation of investors into the dream of getting rich in the stock market. But the 2008/9 nightmare changed all that.

Losses of 30%, 50% or more meant baby boomers would no longer retire rich if they only made 7% or 8% a year until retirement. At that rate, it would take years to just make back what they had lost. To make those 1990s dreams come true, they would need to make more money faster. They would need to take more risk.

Investors became traders. 

Since the low in March of 2009, the TSX 60 index has recovered about 85% of the 2008/9 loss. The two year recovery since then (March 2009 to March 2011) has been relatively easy for traders. These Renaissance traders have, by and large, done fine. And those die-hard buyers and holders who just kept on holding have done okay too. If the stock market keeps on going up, they could break even this year. Our concern is that these neophyte traders don’t understand how risky trading is.

Consider the past year’s action. This is a chart of the Exchange Traded Fund (ETF) representing America’s 500 biggest blue chip stocks. It covers the two years from the 2009 low to March 2011.