This one's for all the investors who are thinking about getting out of the stock market.
Don't do it.
Stocks have hurt many people in the past few years, but they're still an essential portfolio component if you can wait at least five or 10 years and you can stand more ups and downs. It's not just me saying so.
Kim Shannon, one of the country's most successful mutual fund managers, believes we're in a sideways stock market that won't make a sustained move higher for a while yet. Meantime, she thinks investors can still generate average annual returns of 6 per cent, including dividends.
"The problem is that it's going to be a rough bronco ride," the president of Sionna Investment Managers said after a recent presentation to investment advisers in Ottawa.
You sort of knew that, right? Ever since the mid-2000s rally fell apart, stocks have been all over the place. Way down, way up and way down again. Some investors are getting sick of it and they're wondering whether they should pack it in.
Ms. Shannon's argument for staying has to compete with all kinds of other market views, some of which are scaring investors witless. Always check the credentials of anyone pronouncing on the markets. In Ms. Shannon's case, there's a long-term record of minding the downside while delivering solid returns as manager of Brandes Sionna Canadian Equity Fund and before that CI Canadian Investment.
To understand Ms. Shannon's take on the market, you have to go back to March 2000. Investors may remember that as the end of the tech boom, but to her it was the beginning of a sideways market that persists to this day.
Sideways? After the S&P/TSX composite index fell 33 per cent in 2008 and then snapped back 35 per cent and almost 18 per cent in the next two years?
"Sideways markets are incredibly volatile," Ms. Shannon said. "So you're going to get 30-per cent-plus years and you're going to get minus-15-per-cent years."
Her research indicates that sideways markets can last from 15 to 30 years. That would put us 11 years into the market's current move sideways, with at least four more years to go and possibly more.
Why stick around for this up-and-down nonsense? Because, as Ms. Shannon sees it, there are all kinds of opportunities to buy quality stocks at low prices.
"Today, I have a good 80 Canadian stocks with an expected return of 30 per cent or greater [over the next two years]" she said. "Most of the time in the last several years, I've had between 30 and 60 names, maybe, and sometimes I've had as few as 10 or 12."
Bargains are emerging because stock prices are now influenced more by what the major stock indexes are doing than the financial merits of individual companies, Ms. Shannon said. As a value manager, someone who tries to buy good companies at marked down prices, she's looking ahead to a time when investors start paying attention to the fundamentals and stop letting emotion rule their decisions.
Some sectors where Ms. Shannon is finding bargains right now are consumer staples, utilities and telecommunications. "The other sector that is quite fascinating to us is energy. A lot of the big-cap energy stocks are showing huge projected returns." (Big-cap means large companies as measured by market capitalization, or total shares outstanding multiplied by share price.)
Ms. Shannon holds gold stocks right now, but she's mostly sold her holdings in high-flying gold bullion. One gold stock that has her eye is Barrick Gold – "It has a lower PE [price-earnings]multiple than the broader market, which is shocking because it's a gold stock."
One common feature in sideways markets of the past is that Canada has been a top performer on a global basis. Ms. Shannon said our resource-heavy market is responsible. When investors dump financial assets like stocks, as they've done lately, they tend to buy hard assets like commodities. That, in turn, helps the kind of companies that make up half the Canadian stock market.
Some final points from Ms. Shannon: Dividends will make up a major part of stock market returns for the next while, forget trying to time market ups and downs and remember the benefits of buying low. "It's always good to buy the investment class that's been hammered."