This week’s column is written to provide some additional perspective on the recent volatility on financial markets. Following a gradual decline from May to July, global stock prices dropped sharply at the start of August. The Canadian stock market, for example, was down 8% from August 2-9.

The decline was blamed on a number of factors, with concerns about massive government debts in Europe and the United States taking centre stage. The decision by Standard & Poor’s to downgrade its credit rating on U.S. government debt certainly helped to emphasize the issue. Fears that the U.S. and other developed economies could be going into recession again heightened the market volatility. (The general feeling is there is less than a 20% chance of the U.S. slipping back into a recession)

It certainly appears that fear became the main driver of this recent sell-off, given the lack of substantive developments ahead of the decline and the speed of the drop. Consider U.S. government bonds. Despite the credit rating downgrade, investors have been buying Treasuries and the U.S. dollar has been rising.

Although the recent decline is reminiscent of the financial crisis of 2008, today’s conditions are vastly better than three years ago. You will recall that in 2008, a number of financial institutions collapsed and the credit markets froze entirely, which contributed significantly to a recession, as many companies were unable to borrow to invest and conduct business.

Today, in contrast, credit is available and corporations are flush with cash. Many banks and other companies have taken the last three years to strengthen their balance sheets. Tellingly, corporate bonds have held their value well in comparison to share prices. In fact, corporate revenues and profits continue to grow. For the second quarter, 77% of the companies listed on the S&P 500 Index have reported earnings that were higher than expected, and their sales grew by an average of 12.5% over a year ago.

There are other positives to keep in mind. Interest rates remain low and energy prices have fallen, both of which will support businesses and consumers. Employment levels continue to grow in Canada and the United States. Though the pace of economic expansion in developed countries is slowing, forecasters are still calling for positive growth this year. Relatively strong growth is also expected to continue in Asia and Latin America.

What does this means for us as investors? It is very difficult to sit through a downturn, especially with the financial crisis of 2008 still fresh in our minds. However, as I have said before, volatility is a normal part of investing. Historically, equity markets have eventually recovered and benefited investors who stayed the course. We saw this again three years ago, when the financial crisis was followed by a powerful rally in stocks in 2009.

With interest rates being so low, and with the potential for rising inflation, most investors will need to hold part of their portfolios in assets such as high-yield corporate bonds and equities in order to achieve their financial objectives.

That’s why we believe that a diversified portfolio, tailored to your individual goals, is the best approach to investing. Income-based mutual funds are meant to provide some protection against market downturns, while equity-based funds are expected to provide long-term growth.

No one can say for certain when this latest period of volatility will end. However, history shows that markets eventually recover and that long-term investors have been rewarded.

If you would like more information on this topic or would like a review of your current financial plan, please call 778-478-9759, or e-mail kzakus@northbayfinancial.com

This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, or life insurance, and should not be taken as providing, investment, financial, legal, accounting or tax advice. All services provided through NorthBay Financial Services. Mutual funds are provided through Sterling Mutuals Inc. Insurance is provided through multiple carriers. The opinions expressed are those of the authors and do not necessarily reflect the views or opinions of Sterling Mutuals Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds and Segregated funds are not guaranteed, their values change frequently and past performance may not be repeated.