Stocks have staged a significant recovery after falling sharply in the first quarter of 2008. The TSX Composite is up about 19% from its low in January and the S&P 500 is up about 11% from its mid-March swoon. If the lows reached in the first quarter was indeed the market bottom, we can classify the plunge as a severe correction – the TSX was down 18% from its 52-week high and the S&P 500 tiptoed into bear market territory when it was down 20.25% briefly. During the market storm, diversification within stocks wouldn’t have helped; cash and government bonds provided the only refuge.
While the reasonable course of action when markets are correcting is not panicking and staying the course, now may be the time to revisit your asset allocation in light of your reaction to falling stock prices. At times of market turmoil three options are available: (a) sell enough to reach your comfort level (b) stay the course or (c) scrounge every nickel you can find and invest it in stocks. If your inclination was to sell some stocks, your risk tolerance may be less than you originally believed and you may want to increase your allocation to bonds and cash (Now may not be the ideal time to buy bonds either as Government of Canada 5-year bonds are barely yielding 3%).