Markets: Scary when they’re down, scary when they’re up

It’s been barely a month since Alexander Green remarked that we’re currently enjoying “the most disrespected bull market in history.” Green described how investors who were shell-shocked by 2008 were still pulling money out of equities and taking shelter in fixed income and cash. And until very recently, the financial media were fanning the flames of pessimism: a Wall Street Journal reporter called 2012 “another very difficult year for investors” even though the MSCI World Index was up over 16%.

I’m ready to declare this trend is reversing. I have no hard data, but in the last couple of weeks I’ve noticed a dramatic shift in the tone of reader emails. For almost three years, the common refrain was “I’m nervous about getting into stocks because the markets have been terrible lately.” But since the New Year, that’s changed to, “I’m nervous about getting into stocks because the markets have been so good lately.”

In case you missed the irony, let me hit you over the head with it: instead of being afraid because stocks fell sharply in 2008, investors are now afraid because they’ve risen sharply since 2009.

I don’t mean to poke fun at people’s fears. I bring this up because it’s a lesson for investors who have been waiting on the sidelines “until things settle down.” Since the financial crisis, we’ve endured rumours of a double-dip recession, a downgrade of US debt, serious macro problems in Europe, and the fiscal cliff. All those events made investors avoid equities because they feared more losses. I don’t know what lies ahead, but it might be fair to say things have now settled down. But instead of re-entering the market, these same investors are now avoiding them because they think prices are too high. So when exactly do you pull the trigger?

This is what happens when you rely on emotion to make investment decisions. A better approach is to set a long-term asset allocation based on your goals and your temperament and then rebalance according to a schedule. A strategy of buy-hold-rebalance can still be emotionally difficult, but if your asset mix is appropriate you should never find yourself on the sidelines again.

And now the news…

Questrade offers free ETFs. Last week, Questrade became the second discount brokerage to commission-free purchases for all Canadian and US-listed ETFs. (Virtual Brokers was the first to do so last November.) Investors will still pay the usual commission to sell the ETF, but if you’re making regular contributions to your portfolio, the offering has obvious appeal.

I’m all for price wars among discount brokerages, but I worry about the level of service clients receive in the bargain basement. In the last several days, readers have added disconcerting comments to my November post about Virtual Brokers: “Now 30 days since I sent my application for new account to VB,” said one. “On the website, it is said that it takes ‘3 to 5 working days’ to open a new account. They don’t answer the phone or emails.”

If others are willing to share their experiences with the free ETF offers at either Virtual Brokers or Questrade, please do so in the comments section.

HXS dropping its currency hedging. Four months ago, you couldn’t buy a Canadian-listed S&P 500 index ETF that did not use currency hedging. Soon there will be three of them.

In November, both Vanguard and BMO launched unhedged ETFs that track the popular US index. Now Horizons has announced it plans to change the mandate of the Horizons S&P 500 (HXS) to remove the currency hedge. Remember, hedging helps Canadians during periods when the loonie strengthens against foreign currencies, so it was a big benefit from 2003 through 2007, and during many periods since 2009. But many investors seem to think our dollar has little upside left.

I have no view on the direction of currency movements, but I do prefer unhedged equity ETFs, because currency diversification can lower the volatility of a portfolio, and the cost of hedging is a long-term drag on returns.