Financial Jungle

The investment saying, “dead cat bounce”, has been thrown around recently to warn investors about the nasty surprises prowling right behind the beguiling recovery of fallen financial stocks.

While I don’t know where the financial sector is headed in the short run, as a dividend and long-term investor, I try to block these little price squiggles off my mind and focus on my long-term views and investment philosophies. Without the benefit of hindsight, no one can predict where the stock market will go over the next few days, weeks or months.

I remember reading a few doom and gloom posts in the Canadian Business forum just days after the near collapse of US investment banker, Bear Sterns. Pundits plead investors to sell financials as the whole sector was being crippled by subprime, ABCP, derivative, credit, and liquidity crisis. Many critics were combing for and cherry picking web articles that supported their point of views. One of the articles even recommended the following:

“If your only nest egg is your IRA, then I suggest taking half of your money out, and paying the penalties, and buying physical silver or gold immediately from your local coin shop.”

Having radical recommendations like this displayed in a public forum is disturbing. I hope no one actually followed up on this recommendation and parked half their nest eggs in one precious metal. That would go against the principle of diversification. A wrong bet could send investors into a financial tailspin.

Sure enough, over the next 2 days, the Vanguard Financial ETF surged 5.6% and gold slid 5.9%.

“Enjoy the dead cat bounce while it lasts !!”, one critic trumpeted.

But, apparently the dead cat had 8 lives remaining as the Vanguard Financial ETF subsequently rose 4.4% and gold fell another 2.9% as of closing today. Even the two most hated Canadian banks, Bank of Montreal and CIBC, jumped nearly 20% since the March 18th low. The other 3 big Canadian banks (RY, TD, BNS) are also up a respectable 7% on average.

I’m not suggesting everyone to flee their gold investments and plunk 100% into financials. That would defeat the purpose of this post. If you believe a particular sector will stumble in the foreseeable future, why not prune gently instead of pulling out the root system entirely? The best way to keep portfolio risks in check is to maintain a reasonably diversified portfolio across all sectors, and avoid keeping a finger on the buy/sell trigger while reading these sensational forecasts from financial forums no matter how convincing or colourful they may be.