Stormy times in the stock markets
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it’s marked down.” – Warren Buffet
In October 2014, I wrote a post about falling stock markets. At the time, oil prices were sliding; the German economy was rumored to be heading for a recession, and much of West Africa was in the grip of a terrible Ebola epidemic. This “trifecta of doom” prompted many experts to speculate that we were in the early days of a bear market. However, even though the markets have definitely been a little rocky over the past year, we haven’t seen anything close to the disastrous returns that were being projected and many investments have done very well.
I suggested at the time that we should be cautious of accepting “expert” opinions at face value (especially when they tempt us to make investment decisions that are fear-based rather than fact-based) because the truth of the matter is that disaster sells and the media’s job is to feed us hype and speculation disguised as fact and insight.
With some of the headlines that have been trotted out recently, it’s no wonder that many people are nervous about what our stock markets are likely to do over the next 12-18 months. While it’s possible that we might be heading into a bear market, it’s important to remember something a wise person once told me, “Worry about the things you have control over and let everything else go.” Even though it’s a waste of energy to worry about things we have no control over, so many of us worry far too much about our investments and the impact that changing markets will have on their value. I’m not saying that seeing a drop in my investments doesn’t bother me (it does) but, abandoning a good plan to indulge my fears have never worked out well for me and I refuse to let my fears play with my future, especially when it comes to money!
Related article: Is it possible to predict the future of the stock market?
Now, because I don’t have a crystal ball and I can’t predict what the markets will do over the next 12 months, my philosophy is always to focus on the facts and keep my eye on the big picture. I’ve been fielding questions about the markets in almost every education session I’ve facilitated over the past few weeks and so I thought it might be timely to share some key points that might help you “keep your head when all around are losing theirs.”
A question of perspective
The one thing we know for sure about the stock markets is that they’re unpredictable. However, when we look at market returns over the past 70+ years, we can see two things very clearly: firstly, there are far more “up” years than “down” years and secondly, on average, there are 3-8 “good” years between every downturn. When you combine these two pieces of information, it makes it easier to accept that market downturns are a necessary part of a generally upward trend and that, while we might not like them, they are not the world-ending disaster that some media outlets would like us to believe. I firmly believe that a down market is only a bad thing if you need your money or you are invested outside of your comfort zone. If neither of those things applies to you, then a downturn in the markets should be seen as an opportunity, not a disaster. (Easier said than done, I know, but true nonetheless.)
Related article: 5 realities of the stock market
Value versus balance
The other thing to remember when looking at your investment statement is that the amount in your account is just a snapshot; a statement of the value of your investments at a given point in time and, unlike the balance of your chequing account, it doesn’t actually represent a physical amount of cash sitting in an account. When you invest in stocks or mutual funds, you buy shares or units that have the ability to change in value. If you sell your units for more than you paid for them you make money; if you sell them for less then you lose money. However, it’s important to remember that your gain or loss is only real at the point where you sell the units. When you look at your investment statement, the tangible piece of the picture is the number of units you own not their current value. This is something that people forget, especially in a down market, when they equate a drop in value with losing money, and it can lead to panic, stress and poor investment decisions.
Related article: The difference between your account value and your account balance
Down markets bring good opportunities
Most investors will tell you that there is an opportunity in down markets because investments are undervalued and will likely increase in value once the stock market starts to recover. Unfortunately, this message is often drowned out by the panicked chatter of people who see the value of their accounts dropping and want to sell everything they own before it all disappears. I’ve joked many times in seminars that my industry is the only industry where, when things go on sale, no-one wants to touch them with a 10-foot pole and it always makes people laugh because it’s true. Beware of letting your emotions overpower your logic when it comes to investing; make sure you have a plan and then stick to it.
Related article: Should you keep your winners and sell your losers?
Choose the right sources for information
When it comes to investing, it’s important to put your trust in people who have a proven track record of success in good and bad markets. Interestingly, these are not always the same ‘experts’ who appear in the media (or next to the water cooler) which makes it very important not to accept any information at face value. Instead, do your research and decide for yourself who you can trust. Personally, I choose to trust the opinions and actions of a small number of traders who have a proven ability to make money in good and bad markets. Each of them has a different investment philosophy but there are definite similarities in their interpretation of the markets and their attitudes to the upward and downward swings which I find a really useful balance to a lot of the information in the media.
While we have no way of knowing whether the recent turmoil in the stock markets is actually the start of the next bear market or simply another hiccup, it shouldn’t really matter. We have no control over the markets. What we do have control over, is our own investment strategy and our own financial plan. If you’re invested appropriately for your time frame and your risk tolerance then there should be nothing to fear from a bear market and plenty to gain.
Could not agree more. All you hear on the media is doom and gloom from the so called experts. The market bounces back…always and as long as you are no cashing in on your portfolio you should be fine. I find it is alway important to have a short term (1 to 2 year bucket) supply of liquidity that let’s you ride the storm and wait for the rebound
You know what they say – “you haven’t lost anything until you sell”