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It’s a year later. Like the Great Depression, the market meltdown of 2008-09 may have changed investors’ habits forever. After seeing portfolios implode, and then bounce back, what have we learned?

Mike Himmelman's father knew the stock market was no place to be.

It was, however, a different time: 1950s Halifax, where plenty of folks had lived through the Great Depression and the turgid stock market that lasted for more than two decades after.

"If you bought in that heady period of the late 1920s, you didn't see your money back until the 1950s," Mr. Himmelman said. "That was a game-changer."

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While his father invested only in savings bonds, Mr. Himmelman took a different path, hiring on with Merrill Lynch in 1973 and finding a career in financial advising, now with Citadel Securities Inc. After more than 35 years' experience, he's not so sure the market chaos of 2008-2009 is the great psychological paradigm shift some make it out to be.

Investors in their 60s who had just 40 per cent of their portfolios in equity lost just 16 per cent over all if their equity piece fell 40 per cent, he notes - and that loss was offset by bond-market gains.

For those more fully invested in equities, "now, we see the market is down 20 per cent from its peak, but up 55 per cent from where it was last year," he said. "Anyone starting last year is absolutely delighted."

We're getting back into the greed, and the greed is driven by desperation for returns from equities - the yield on bonds just isn't there." Beth Hamilton-Keen

Indeed they would be, although most investors have been in the game longer - long enough, in fact, to have shepherded their money through the worst decade for equities in a century, the 2000s. Interviews with Canadian money managers and other market watchers suggest investors are now taking widely differing approaches to the market this RRSP season, with some still sitting on the sidelines, paralyzed by indecision, and others jumping back into risk in an effort to make back their lost fortunes.

To recap the decade's damage: From a high of more than 1,550 in March, 2000, the Standard & Poor's 500 was cut in half by mid-2002 in the first bust of the decade. Five years later, in mid-2007, investors were made whole - only to see another gigantic loss, nearly 60 per cent, over 18 months.

The second decline was more terrifying than the first, as several hallowed Wall Street institutions collapsed or teetered on the brink.

"It was like the air leaving a balloon, the shock of the bankruptcies, Ponzi schemes, banks going bust, and the fear mongering from the financial media - the world looked like it was coming to an end," said Irwin Michael, portfolio manager of the $900-million ABC Funds in Toronto. "It infected investor psychology to the point where people were genuinely scared, talking about a depression. … I had clients who left [stocks] some at the very bottom of the market. I can't say I blame them."

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But the rapid and unexpected rebound in the latter part of 2009 has now created three camps, says Jonathon Palfrey, a senior vice-president at Leith Wheeler Investment Counsel Ltd. in Vancouver.

"There are investors who ratcheted down their risk after the fact, so the market upturn hasn't meant a lot for them because they weren't invested," he said. "Others have taken on more risk, chasing returns to get back their losses from 2008."

And for the third camp, Mr. Palfrey said, "staying the course seems pretty simple, but those who resisted the temptation to time the markets have had more volatility than they'd like."

. Weigh in on whether you would stash some extra money into an RRSP, RESP or a TFSA.

The second camp of investors, as Mr. Palfrey describes it, is perhaps the most counter-intuitive.

Rather than be chastened by their losses and embrace more conservative investments, they are moving in the opposite direction.

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"We're getting back into the greed, and the greed is driven by desperation for returns from equities - the yield on bonds just isn't there," said Beth Hamilton-Keen of Mawer Investment Management Ltd. in Calgary. "A lot of conservative investors will be pushed to consider things they shouldn't."

Part of investors' psychological problem, Ms. Hamilton-Keen said, is that "a lot of people are looking at their high-water mark, and they're still not close, so they're hoping this [rally]continues. Unfortunately, it's not their original capital they're measuring back to, it's the peak it hit."

Still, Reena Atanasiadis, a lecturer at the John Molson School of Business at Concordia University in Montreal, sees signs of a fundamental change in investor behaviour owing to the financial crisis and its attendant economic fallout. The savings rate in the United States has swung from negative 4 per cent to positive 8 per cent.

"We're talking about a trillion dollars less that Americans are spending - clearly they're feeling it."

She concludes: "A lot of people don't mind being in cash, because they believe that uncertainty is best handled with cash. We're seeing panic and that's manifesting itself in 'wait and see.'"

Mr. Michael of ABC Funds has a similar view of the long-term effects of what investors have just been through.

Until the crash of 2008-2009, "There was no fear. This market provided us with fear, and my sense is the scar tissue, the memory of the last two years will be indelible, at least for this generation."

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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