Five years on – the lesson from market extremes

By Dan Hallett, CFA, CFP on November 20th, 2013

Five years ago today, the investing world was frozen with fear.  Stocks markets had collapsed; Lehman Brothers had slid into bankruptcy several weeks earlier; and discussions were accelerating regarding letting GM and Chrysler do the same.  Fear was abundant and nobody was in the mood to rebalance their portfolios to buy more stocks, which were still in a free-fall.  And on that day, I was tasked with imparting some investment wisdom on a group of financial advisors and affluent investors.


On November 20, 2008 I spoke to a powerpoint presentation loaded with slides showing the then-current bear market in a historical context – while doing the same with a variety of valuation statistics for North American stocks.

A summary of my conclusions:

  • North American stocks were at 20-year lows relative to earnings and book value.
  • On an interest-rate-adjusted basis, U.S. stock yields were at a four-decade high.
  • High yield bonds were sporting the highest spreads and yields in several decades.
  • Stocks and high yield bonds were very attractive and they should be purchased with a focus on their longer-term fundamentals.

While it’s now clear that it was a good idea to invest five years ago, it’s helpful to add some numerical context.

Five years later

The table below shows how investing in various market segments fared within six months and after nearly five years after November 2008.

Market Segment

Total Return 6 months later*

Total Return 5 years later*

Canadian Stocks



U.S. Stocks**



Overseas Stocks**



Emerging Markets Stocks**



High Yield Bonds**



Canadian Bonds



U.S. Bonds**



*Return figures are not annualized and cover the period starting on December 1, 2008.  For the 5 year figure, returns are 59 months (i.e. through October 30, 2013).  **Returns for these market segments are all denominated in Canadian dollars

With stocks having lost 45% to 60% by the day of my presentation and bad news everywhere, it’s interesting to look back at what happened subsequently.  Those who took the advice to invest in the riskier market segments shown in the above table would have seen their investments fall in value for three months before starting to see some upward movement.

Three months is a long time to wait while it feels like the economy is crumbling around you.  It’s not for the faint of heart.  But those with tough stomachs and patience were rewarded with some dazzling rates of return.

Focus on fundamentals to keep perspective

I can still vividly recall my mindset during that time.  It was frightening.  I spent many hours reading one news story after another and hearing too many people say that it’s going to keep getting worse.

I grounded myself in two ways.  Most significantly, I dug into the numbers that I knew mattered most – fundamental valuations.  The more I dug into valuations and the expectations that were embedded in then-current prices, the more comfortable I felt with investing for at least a five year period.

Whether it was the euphoric high of tech stocks in 1999 and 2000 or the devastating lows of the 2007-09 financial crisis, blocking out the noise of 24/7 business news and focusing on fundamental valuation was key to giving clients what time has proven was the right advice.

While stocks are on the expensive side of history today, we don’t appear to be at the extremes we’ve seen in the past – but we are rebalancing many client portfolios.  In any case, whenever the investment landscape grips you with significant fear or euphoria, make sure you stay grounded in fundamental investment merit.