Investing in 2008

The following article was contributed by Ottawa-based financial planner Rick Sutherland, CLU, CFP, FDS, R.F.P.

The market conditions experienced during the second half of 2007 generated worry and angst among investors. It is important to realize that market dips have two sides and it is not all negative. The first side that causes concern is the “down side”. There is however a second side called a “recovery”. This is when long-term investors reap the benefits of patience.

Let’s first look at 2007 and try to assess what happened. The Canadian market had been surging ahead since 2002. This was largely driven by rising commodity and specifically oil prices. The Canadian dollar tapped $1.10 against the US dollar for a brief moment during 2007. And the sub-prime lending practices in the United States came to an abrupt halt in the summer of 2007.

The sub-prime affair was probably the most worrisome event of 2007. It is now apparent that lenders were loaning money to unqualified borrowers at ridiculous rates, creating a boom in real estate. Many borrowers did not document their income honestly, making it easier to over state their credit worthiness. As long as home prices were rising, borrowers could refinance to solve their credit problems. But eventually home prices stopped rising and borrowers fell behind. The situation became unsustainable. Thus, the value of securities backed by loans started to fall.

The financial service sector became vulnerable due to the sub-prime chain of events. Prices in this sector have fallen dramatically, some as much as 50%, or more. And the pain wasn’t just in the US. The financial sector in Europe and Japan felt the sub-prime effect. The substantial drop is being viewed as a very significant purchasing opportunity by long-term disciplined investors.

So what opportunities are available in Canada? Even though Canada has already seen tremendous growth, there are some who feel this trend will continue. Developing countries are moving from a rural to an urban society. This is creating demand in the oil, agriculture and commodities sectors. Canada has expertise in all three areas. On a note of caution, the high Canadian dollar may not bode well for certain manufacturing sectors that were previously beneficiaries of a low dollar.

Thus, being an astute investor sometimes calls on the demand to be an opportunity seeker. Realize that there are two sides to market movements and have courage to invest when others are running scared. This could be a great time for nerves of steel. Make your investments with conviction and be patient.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.