The current renewed downward volatility in the world stock markets (Volatility is a nice way of my saying my stock portfolio looks like…****!) is reviving unwelcome feelings of anxiety, fear, and a sense of powerlessness. However, acting on our emotions we can end up doing more harm than good.
The increase in market volatility is an expression of uncertainty in the world. The debt strains in the US and Europe, together with renewed worries over financial institutions and fears of another recession, are leading stock market participants to apply a higher discount to risky assets. Example – You own a house in Key West, Florida and there is a category 5 hurricane over Cuba. What price could you demand for your house days before the storm hits? After the hurricane passes and the sun comes out again and the house is still standing, is the house worth more or less than just before the storm? An individual willing to buy during and before the storm deserves a lower price because of the uncertainty (RISK) at that time. If they buy right before the storm when risk is the highest, they are expecting a much greater return then when the weather returns to clear and sunny. So… developed world stock markets, oil and industrial commodities and emerging stock markets are going lower as risk aversion drives investors to the perceived safe havens of…YES, US government bonds, gold, and Swiss francs. As to what happens next, no one knows for sure (Hurricane example). When you hear investors are fleeing the stock market, remember they need a buyer to flee and buyers are demanding a lower price with all the uncertainty (RISK) – That is the nature of the markets. There are a few points we can keep in mind to make living with the downward volatility more bearable & a stock portfolio looking like…****!).• Remember that markets are unpredictable and do not always react the way the experts predict they will. The recent downgrade by S&P of the US government’s credit rating actually led to a strengthening in US Treasury bonds.
• Quitting the equity market at a time like this is like running away from a sale. While prices have been discounted to reflect higher risk, this is just another way of saying future expected returns are higher.
• Market recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was at least this bad—the S&P 500 turned in seven consecutive months of gains totaling almost 80 percent. This is not a prediction of what will happen this time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery. Remember, nothing lasts forever. Just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the correction back to higher valuation.
• Never forget the power of diversification. While equity markets have had a rocky time in 2011, fixed income markets have flourished making the overall losses for balanced investors a little more bearable. Diversification spreads risk and can lessen the bumps in the road. Suddenly US savings bonds, AMEX and ING accounts paying 1% look great!
• The global economy is forever changing and new forces are replacing old ones. We don’t know when and where the next great thing like the internet will come from and change our lives forever. Can you imagine what it would be like to live without the internet today? –Likewise, we can’t imagine the next great thing to improve our lives forever!
• Just as we do during times of stock market volatility upward and a stock portfolio looking good we should remember to do the little things; keep saving, working hard, enjoying a hard earned & well-deserved retirement, working together, striving to be our best, living within our means, avoiding bad mistakes, taking advantage of opportunities, tempering our emotions, taking advantage of low interest rates/“refinances”, reducing taxes paid, reviewing insurance and estate plans, recalibrating risk levels and time frames needed to achieve goals, rebalancing to target asset allocations and continuously updating our financial plans. The secret is to enjoy the long ride. Just as it is hard to grow old, the alternative is much worse.
The market volatility is worrisome and a stock portfolio looking like…****! generates feelings that are completely understandable. By doing the little things; fiscal discipline, diversification, and remembering how markets work, can make the long ride a little more bearable. At some point, value will re-emerge, risk appetites will re-awaken, and for those who acknowledged their emotions without acting on them, relief will replace anxiety and hopefully, a diversified stock portfolio looking healthier! I know you’re getting tired of reading emails from us – SO if you want/need to talk or vent about a stock portfolio looking like…****! please don’t hesitate to call or schedule an appointment. We would love to hear from you.