Can markets suffer from depression, just like people do? The surprising answer is yes, according to researchers at the University of Toronto’s Rotman School of Management.

Professor Lisa Kramer and her colleagues discovered that annual market downturns worldwide coincide with the onset of SAD, or seasonal affective disorder, a type of depression that usually occurs in the fall and winter, when there’s less daylight. Wealth Advisor spoke with Professor Kramer about her findings.

Many investors are now watching for signs of a market recovery. But re-engaging with the equity markets is not only a question of when - it’s also a question of how. And that’s where exchange-traded funds, or ETFs, can prove valuable.

ETFs are becoming a more familiar product to Canadian investors, having been available since the 1990s. Like mutual funds, ETFs are portfolios, but their shares trade like individual stocks on exchanges such as the TSX, DJIA, NYSE and NASDAQ. Most ETFs also track the performance of a market index or sub-index, which makes them more like index mutual funds.

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Good news: you’re getting a tax refund! What should you do with it? Sure, you could spend it. After all, it’s really just your own money being returned to you. But why not consider using it to increase your financial security? With the April 30 tax deadline approaching, now’s a good time to start thinking about ways to get the most out of your refund:

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You’ve already taken charge of your own investment portfolio with BMO InvestorLine. Why let someone else manage your RESP? With RESPs now added to our diverse product lineup, we’re making it even simpler for you to invest for your children’s education. Thanks to our detailed RESP account tracking and robust RESP Corner, you’ll always have a clear picture of your family’s finances, and you can manage them easily – all in one place.

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Looking for expert commentary and insight into the state of the Canadian economy? Check out our latest webcast: Economic Outlook: The Big Question

Visit the webcast section to access new webcasts added to our already diverse line-up.

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Can markets suffer from depression, just like people do? The surprising answer is yes, according to researchers at the University of Toronto’s Rotman School of Management.

Professor Lisa Kramer and her colleagues discovered that annual market downturns worldwide coincide with the onset of SAD¹, or seasonal affective disorder, a type of depression that usually occurs in the fall and winter, when there’s less daylight. Wealth Advisor spoke with Professor Kramer about her findings.

Can you outline what you uncovered about moods and markets?
Extensive clinical research on SAD has shown that millions of individuals all over the globe experience increased risk aversion when the hours of daylight shrink in the fall. As the days lengthen in the winter and spring, they become more tolerant of risk. Our research is the first to show there is direct evidence of SAD-related investing behaviour by individual investors.

How can an individual investor’s mood impact market behaviour?
When masses of people become less tolerant of financial risk as fall sets in, the overall appetite for risk becomes lower and returns on financial securities can respond. We observe in the fall months equity returns are lower and when we start turning to winter and spring, the returns rebound.

The interesting thing about these findings is the effects appear to be more dramatic at more extreme latitudes. Financial markets in countries like Sweden, for example, have larger swings in their seasonal returns. In the southern hemisphere, countries where the seasons are six months out of synch, so are the seasonal patterns. When we look at safe securities like government bonds, we find an opposite seasonal pattern: during the seasons when risky securities have high returns, government securities have low returns. We factored in other influences like past performance and advertising; the results were the same.

In fact, I would conjecture that it’s not a coincidence that historically so many financial market crashes happened in the month of October. Not to say that seasonal depression causes market crashes, but rather when economic news is very poor at that time of year, the natural inclination of investors is to react more negatively.

Is there a direct causal connection?
We can’t prove a causal connection, but we can say the evidence is consistent with what we are hypothesizing.

If we extrapolate, would you say as the daylight increases, people become more risk tolerant and there’s a better chance the markets will start to move up?
When daylight is becoming more abundant, moods tend to become more cheery. I think that does lend buoyancy to the market. Will that cause a recovery in the market? Based on our research, it is a helpful influence.

Do you agree that the big questions underpinning any market recovery relate to the economy?
Yes, fundamentals are key. If the fundamentals don’t cooperate, then we’re going to be in this situation for some time to come.

How should investors use your findings?
My research tells us when a financial crisis happens in the fall, it’s exacerbated by our emotional state. Studies in psychology have shown that depressed individuals, such as those afflicted with SAD, experience heightened risk aversion. That’s something to keep in mind; you don’t want to do anything drastic any time, but particularly when you’re already predisposed to feel more risk averse.

So the market downturn, coupled with the SAD phenomenon, creates a potent mix for some investors?
Exactly. Feelings of panic at a time like this are completely natural. We’re all told about diversification and sensible financial planning and holding for the long term. Yet we have these urges when the market plummets to do something very impulsive and we’re made to feel that that’s wrong. I think it’s very natural, but sometimes what comes naturally is not in our best financial interest.

The natural inclination for investors right now is to want to sell everything and to shift holdings completely into cash, which is what a lot of people are doing.

Some sage investors actually recommend doing the exact opposite. I’m thinking of Warren Buffett, who says when people act fearful, he tries to act greedy. Statistics aren’t able to guarantee that markets won’t decline further than they already have, but if investors lock in capital losses at very low prices by converting their holdings into cash, they’ll likely miss out on some of the gains as the market turns up.

Do you agree that if investors’ time horizons are longer than five years, they don’t need to be immediately concerned about the markets?
Yes, that is right. Somebody who has the luxury of several more years in the workforce, or who doesn’t need to touch their investments, really shouldn’t be panicking right now because there are still years left to recover. History tells us those who plan for the long term are rewarded.

I think information is power: the more investors understand about behavioural finance², the better they understand the inclinations they have when it comes to making financial decisions.

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Many investors are now watching for signs of a market recovery. But re-engaging with the equity markets is not only a question of when - it’s also a question of how. And that’s where exchange-traded funds, or ETFs, can prove valuable.

ETFs are becoming a more familiar product to Canadian investors, having been available since the 1990s. Like mutual funds, ETFs are portfolios, but their shares trade like individual stocks on exchanges such as the TSX, DJIA, NYSE and NASDAQ. Most ETFs also track the performance of a market index or sub-index, which makes them more like index mutual funds. Unlike index mutual funds, however, ETFs allow investors to seize opportunities by trading intra-day.

ETFs sound simple, and they are. Their transparency is particularly attractive when taking into account management fees that are a quarter (or less) of those for mutual funds. Easy to track intra-day, ETFs can also be bought and sold quickly for the cost of a trading fee. For all these reasons, they have become an important portfolio holding for individuals, as well as for pension funds and other institutional investors. If you look at the holdings of mutual funds, it’s not surprising to find an ETF in the top 10 from time to time.

The advantages of ETFs are prompting an enormous surge in their popularity. While mutual funds shed assets in the second half of 2008, ETFs experienced net inflows. That’s causing them to proliferate, along with the firms that provide them. Canadian investors can now choose from 104 ETFs listed on the TSX, offered by three major players. However, more investment firms have filed preliminary prospectuses to offer ETFs, including BMO Financial Group, which will launch seven ETFs this spring.

A tactical approach

The essential question is, why are ETFs important to investors now? Those who forgo using an advisor often take a more tactical approach. Many are watching and waiting for a recovery, and intend to employ strategies to harness the power of a recovering market.

ETFs can be an important tool in a tactical approach. For example, if one believes that blue-chip dividend-paying stocks represent the best first step back into the Canadian market, an S&P/TSX 60 ETF can fill that bill quickly and inexpensively. Or an investor can select a few of the most promising stocks from the S&P/TSX 60 and hold them next to an ETF – a strategy known as "core and satellite."

Sector sub-indexes are also covered by ETFs. Should investors believe that certain Canadian sectors have been undervalued in the global economic crisis, they can test that theory by buying shares of a corresponding sector ETF. These ETFs are simple to track, even intra-day, and quick and inexpensive to sell if necessary. BMO InvestorLine clients can even use services like stop orders with ETFs to protect their profits or limit losses.

In a world of increasingly complex investment products, ETFs stand out with their simplicity, transparency, versatility and low cost. They enable investors to buy a segment of the market quickly, without having to compare dissimilar mutual fund portfolios and managers. It’s rarely a good idea to give up your best actively managed mutual funds, but it’s smart to remember ETFs when you believe a market recovery is at hand.

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Good news: you’re getting a tax refund! What should you do with it? Sure, you could spend it. After all, it’s really just your own money being returned to you. But why not consider using it to increase your financial security? With the April 30 tax deadline approaching, now’s a good time to start thinking about ways to get the most out of your refund:

1. Top up your RSP
   Consider depositing your tax refund into your RSP – provided that you have sufficient room. An early contribution to your RSP for 2009 is one of the most tax-effective uses for your refund: contributing early allows your money to grow tax-deferred for several extra months before next year’s deadline, and will generate a tax deduction for 2009.
   Sign in to your account and check out the Retirement Corner under Planning for numerous ways to top up your RSP account.
   
   
2. Contribute to a Tax-Free Savings Account (TFSA)
   Take advantage of tax-free savings and growth when you contribute to a TFSA. You can deposit up to $5,000 per year to your TFSA through a broad selection of investments: stocks, fixed-income securities, mutual funds and GICs. What’s more, you can make withdrawals to pay bills, spend on a vacation, or finance a down payment – with no tax penalty. Also consider using your TFSA to put money aside for added peace of mind during economic uncertainty.
   Sign in to your account and visit the TFSA Corner under Planning for ways to make your TFSA contribution.
   
   
3. Contribute to an RESP
   It's never too soon to start saving for your children's education. The earlier you start, the less you'll need to save. With a Registered Education Savings Plan (RESP), you can save and invest on a tax-deferred basis – until you withdraw the money to pay for your children's post-secondary education. Even better, you can receive additional contributions up to a lifetime maximum of $7,200 per eligible child under the Canada Education Savings Grant.
   Sign in to your account and check out the RESP Corner under Planning for more information.
   
   
4. Pay down credit card debt
   With credit card interest rates anywhere from 10 to 25 percent annually, it makes sense to use your tax refund towards paying off high-interest debt. That's because the lower the outstanding balance on the credit card, the lower the interest charged. Depending on your interest rate, you can save anywhere from 10 to 25 percent per year in interest on any portion of your balance you manage to pay down. Using your refund to pay off an extra $1,000 of debt this year could save you a bundle in future charges.
   
   
5. Make an extra mortgage payment: If your mortgage allows you to make prepayments with no penalty, using your tax refund to pay down more of the principal could save you thousands of dollars in interest. Any of these options will pay off well beyond the face value of your tax refund cheque, saving you future taxes and/or interest charges, and keeping more of your hard-earned dollars in your pocket.
   
   

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You’ve already taken charge of your own investment portfolio with BMO InvestorLine. Why let someone else manage your RESP? With RESPs now added to our diverse product lineup, we’re making it even simpler for you to invest for your children’s education. Thanks to our detailed RESP account tracking and robust RESP Corner, you’ll always have a clear picture of your family’s finances, and you can manage them easily – all in one place.

Consolidation saves you money

Consolidating your investments can really add up. Clients with assets over $100,000, as well as 5 Star Program and Active Trader Program clients, can take advantage of our flat fee of just $9.95 per trade. To gain full control of your investment portfolio, it just makes sense to consolidate your assets with BMO InvestorLine.

Open a new RESP, or transfer your existing one today. There's no minimum transfer amount required. To transfer your RESP sign in to your account, go to the RESP Corner under Planning and complete the transfer form in the Forms section. Also included in this section is our RESP calculator, FAQs, and articles to help you with your plan.

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Looking for expert commentary and insight into the state of the Canadian economy? Check out our latest webcast: Economic Outlook: The Big Questions.

Visit the webcast section to access new webcasts added to our already diverse line-up.

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Enjoy the convenience of accessing your account statements online anytime, anywhere. Sign into your account at bmoinvestorline.com and edit your Account Profile in the Account Services section.

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A survey of Canadian households shows that investors have only 13% of their total wealth in non-Canadian holdings.* Conversely, many large pension plans are allocating more to their portfolios’ global content. For example, the Canada Pension Plan’s global equity portion has grown to 35%, according to the The Globe and Mail (Feb. 26, 2007). You decide how much global content may be right for you, to help you capitalize on opportunities and reach your investment objectives.

*Source: Investor Economics, Household Balance Sheet Report, 2007 edition

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