Investing in Volatile Times: History not Hysteria
As of the market close on August 10th the S&P 500 index was down some 205 points or 15% since the high on April 29th. With daily 500 point swings in the financial markets, it's hard not to feed into the hysteria that is pervasive out there. The medial feeds on hysteria and emotion, so it's no surprise that this is affecting individual investor sentament.
At the moment, folks are downright skeptical about investing in stocks and distrusting of the entire financial system. Retirees who need to live on their money are feeling insecure. 401(k) phone centers are reporting that while many individuals are leaving their existing balances where it is in hopes that it will come back, they are investing their new contributions in money market and stable value funds, the safest investment options. It is disheartening to see this activity and these are indications that the investment process must include cash flow planning and that emotions should never rule investment decisions.
But before you dump your stocks, keep this in mind: it's easy to be hysterical, but better to be historical. Let history be a guide to probability and how to invest, not the hysteria about the possibilities that we hear in the media.
First, what seems to be driving the current volatility in the markets? At the moment it appears to be rumor, not fact.
Rumor: some large banks in Europe may fail spreading a financial contagion around the world.
Fact: Some of the largest banks have passed recent European Bank Sress Tests and their CEOs have stepped up to state that they are well capitalized and their earnings are on track for gains.
Rumor: the US economy is headed for a dreaded double-dip recession.
Fact: there is no data yet that supports this view. In fact, the recent jobless claims fell to a four month low suggesting slow but continued progress in the economy.
Rumor: Standard & Poor's recent downgrade of US Treasury debt will cause wide spread selling of treasuries and rapidly rising interest rates.
Fact: After the Feds recent statement in respect to keeping interest rates low until mid-2013, investors bought treasuries sending prices up and yields down.
History, not Hysteria
Here are a few historical points of reference that should help to settle folks down a bit:
With the drop in the markets, folks tend to think this will continue in one direction which is down. But according to Birinyi Associates, since 1962, of the 25 market corrections that measured 10 percent or more and occurred during bull markets, only 9 have turned into bear markets.
While there is a possibility that the US economy could head into a recession, it is not the view of most economists. Slow growth does not for sure mean a recession is coming. Since 1945, there have been 25 quarters where GDP growth was less than 1 percent. But only 12 of those periods were followed by recession.
So what should investors do in times like these? For starters, I like to use periods of downside volatility to take measure of the risk in a p0ortfolio: if your portfolio fell less than the comparable indexes, then you are well diversified. If not, consider changing a few positions to reduce your risk. Second, wake up to that fact that the investing world is changing, where the US dollar will become less important and global growth in emerging markets will continue at a faster rate than in developed economies. Owning some precious metals and global bond funds that invest in bonds issued by governments of foreign nationalities makes more sense now than ever.
Ray Martin
View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.
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