In my experience, capital markets tend to fluctuate between extremes of fear and greed; and it seems pretty clear that fear rules the day right now.

Consider the 2009 RSP season, which just closed recently. Normally, the season sees a huge flow of money into equity mutual funds. But this year is a dramatic exception: compared to last year, mutual-fund RSP deposits are estimated to be down more than two-thirds, by some 68%. And of the relatively paltry $1.8 billion that did flow into mutual funds this year (compared to last year’s $5.5 billion), only some $400 million found its way into stock- or bond-based funds. The other $1.4 billion all went into short-term money-market funds.

It’s been a tough year for equity mutual-fund investors, and these figures show it: they’re voting with their feet. The steep stock-market declines of the past twenty months have persuaded most investors to seek out alternatives; and this drop in deposits is a pretty good reflection of what’s going on in all the capital markets. Investors, both retail and institutional, are waiting on the sidelines – waiting for the moment when they feel the time is right to return to stocks.

They’re not wrong to feel discouraged. The economic outlook right now is pretty bleak, and there seems to be no end to the bad news. Many publicly traded companies will not survive this turmoil; the wounds to their businesses will prove fatal. The values of shares in those companies will be destroyed, their customers and market shares going to their competitors. The weak will fall, and only the strong will survive.

Strange as it may seem right now, though, we have to remember that, in spite of recent events, markets WILL recover over the coming years. Granted, the challenges are enormous. Investors, not surprisingly, are clamouring for bailouts and government interventions, which they see as the magic bullet that will fill their pockets again. But experience tells us that these are not the forces that will truly end the crisis. Government intervention may be a necessary stop-gap measure, but what will truly lay the ground-work for a sustained recovery is simply the natural forces of the market at work.

A good example of this is the price of oil. With so much going on in the market as a whole, relatively little attention has been paid to the falling price of oil. We know it wrought devastation in the oil patch, causing cancelled drillings and a build-up in inventories, all meaning much less activity in resource based industry or related businesses. Yet low oil prices are a huge boost to the economy. The estimated stimulus that lower oil prices will give consumers is almost three times the combined value of the interventions of the U.S. and Chinese governments.

What’s more, lower fuel prices aren’t like government incentives, bureaucratic and often poorly aimed. They’re more like lower taxes, putting dollars directly into the pockets of businesses and consumers.

Of course, cautious investors are still justifiably scared. Swings in asset prices have been devastating, and anyone who hopes to buy in faces a daunting task: bear-market bottoms are notoriously hard to spot. If you’re attempting that kind of timing, remember the one true constant of all bear markets: the largest number of investors will leave at the bottom. The mutual-fund flows of the past year certainly reflect that truth.

Alan MacDonald is an Investment Advisor with Richardson Partners Financial Limited. Alan helps investors with over $500,000 of assets make smart decisions about money. For more information please visit alanmacdonald.ca or e-mail Alan at Alan.Macdonald@RichardsonGMP.com

Richardson Partners Financial Limited is a member of CIPF.