Your investments: Reports of market death have been greatly exaggerated

Shekel money bills (photo credit: REUTERS)
Shekel money bills
(photo credit: REUTERS)
Turn back three months and market pundits were all singing the same song that global stock markets were about to crash. Led by the economic slowdown in China and potentially higher interest rates in the US, markets did drop almost 15 percent in the US and much more in some emerging markets. The pundits were in ecstasy at the impending doom. Interesting that investors losing money is what gets them all excited, but that’s for another column! Fast forward a few months and the famous Mark Twain quote, “The reports of my death have been greatly exaggerated,” is very apt regarding financial markets.
Panic doesn’t pay
Back in August, during the height of the market drop, I wrote: “Global financial markets have had quite the month. Worries about China’s slowing economic growth, currency devaluation and stock-market drop have sent investors into a panic and left global stock-market averages much lower than they were a few weeks ago. With the 24/7 news cycle, Twitter and other forms of social media all proclaiming the end of the financial world as we know it, investors should stay calm and not panic. I have heard stories of terrified investors selling their entire portfolio because they are afraid of the market ‘crashing.’ Is that a rational decision?” I went on to describe the corruption in the Chinese economy and that when you hear that regular people are taking out bank loans to purchase stocks, it sure sounds like a bubble about to pop. I then added: “I postulate that this is all an excuse for the markets to do what they naturally do, and that is drop. Investors get spoiled when markets continually go up, but a 10%-15% drop is relatively common and actually healthy for the stock markets’ long-term prospects.”
I don’t mention this to brag and show off that I was correct.
Just ask my family how often I am off on my predictions! Rather, it’s to show that once again history repeated itself. There was no need to panic, as it took just a few months for the market to come roaring back and recover much of what was lost over the summer. This isn’t the first time this has happened, and it won’t be the last.
Long-term investors shouldn’t get caught up over shortterm market gyrations. Markets drop, but after each drop, markets recover, sometimes immediately. Sometimes it takes a bit of time, but the recovery happens. Those investors who wait on the sidelines until they receive some kind of “indicator” that the market is headed higher are inevitably the ones who lose. That “indicator” usually comes after the market has made a huge recovery, and they missed it.
I am not downplaying investor fear. It should go without saying that money invested for growth should be money that you can afford to lose, because in the short term, no one knows if the market will go up or down. If you can’t stand the volatility of the markets ups and downs, then change your asset allocation. Take your foot off the gas pedal and buy some fixed-income investments to make your portfolio less aggressive. But please do yourself a favor, and don’t panic, sell everything and just wait on the sidelines.
In closing, I would like to repeat advice that I have given countess times to clients and written in this column. I have been asked what I believe is the secret to building wealth. I answer that it’s to buy quality assets, whether stocks or real estate, and just hold on to them. If you can buy them at a 20%-25% discount, more power to you. But if not, just keep on buying solid assets and saving. That’s the secret to longterm wealth building.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates. Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.