Dealing with world market turmoil and uncertainty in 2001

Like the entire world, I am shocked about the recent events in New York and Washington. This event is very close to my heart because I just returned Sunday by plane from Manhattan after attending one of my closest friend’s wedding. I took pictures of the World Trade Center only last week marveling at its grandeur.

My heart goes out to all those that are impacted by this awful event. With so many innocent people affected, money may not seem so important but I feel it is appropriate to write about the uncertainty that lies ahead in the markets for investors.

What lies ahead in the markets?

At the time that I write this article, the stock markets in North America remain closed and the investors I have talked to all have the same questions. What will happen to the markets now? Should we be doing anything to our portfolio? Should we move to cash?

The unfortunate reality is nobody knows the answers to these questions. This is a unique event and no one really knows how to deal with investment decisions given the circumstances. Don Reed from Templeton says, “This attack is an unprecedented event and no one knows what is going to happen in the short term.”

On one hand, we can try to look at past events like Pearl Harbour, the Korean War, the Cuban Missile Crisis, the Kennedy Assassination and the crash of 1987. In all these major historical events, markets dropped quickly but recovered within a 12-month period.

In light of this event, we have been busy talking to fund companies and managers to get perspectives from industry experts and professionals. I wanted to share with you some of the information received in my recent correspondence:

Market timing

If I had to make a guess about where markets will go when markets reopen, I would guess that they would go down. With what happened in Europe, markets dropped dramatically the first day and had a modest recovery the second day. The two catalysts for market drops will be UNCERTAINTY and PANIC.

Given that most people think the markets will drop initially, will it make sense to move money to cash? Theoretically, while this may make sense, it can be very difficult to implement. According to an article sent out by Synergy Mutual Funds, “We expect any market response to be too rapid to be tradable.”

The other problem is markets can rebound quickly and most people miss out on the biggest rebounds because they happen fast and investors cannot react quickly enough.

Market timing has and will always be a risky strategy. Market timing is not a one-time decision but rather a multi decision process. You must make the right decisions over and over again. While selling to cash may seem to be the right decision now, you may not be able to react fast enough and you may make the wrong decision to get back in. My belief is market timing is near impossible.

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A test of patience

Without a doubt, this is a difficult situation. History has taught us that if rationalism and calmer heads can prevail, the terrorist acts will not have a lasting market and economic impact. Eventually, the world will get past this crisis (as it always has in the past) and be poised for continued economic prosperity.

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Every bear market is simply a test of patience. This last bear market has been one of the worst in post-war history both in magnitude and time. Just when we might have seen some light at the end of the tunnel, our patience will continue to be tested.

The long-term movement of the markets will lie in fundamentals related to economics, earnings, profits, prices, spending, and rationalism. Many of these have not changed dramatically. Short-term movements are related to emotions, psychology, sentiment, and speculation, all of which are unpredictable.  Over the short term there will be volatility but over longer periods of time, there is less volatility or variance of returns

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Where do we go from here?

Unfortunately, I do not have the answers for you. Nor do I think anyone has these answers for you. What I can tell you is that I am going to do nothing. I have no plans to move my own money into cash and most of the professional money managers I have talked to plan to implement the same course.

Calmer heads have always prevailed over panic. Fear may rule the investment world for a while but just like in 1941 (Pearl Harbour), 1950 (Korean War), 1962 (Cuban Missile Crisis), 1963 (Kennedy Assassination), 1987 (Black Monday) and other panic times too numerous to mention, normal life will eventually return.

I leave you now with a quote from author Nick Murray, “The mortal enemy of investment success is fear. The key to investment success is to avoid selling out of fear. Wealth isn’t primarily decided by investment performance but by investor behavior.”

Note:  This is an old article written back in 2001 when the markets experienced unprecedented volatility (at that time).  Since then other corrections or bears have also occurred and like in 2008 and 2019

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