Turbulent Markets? Why you should ignore investment scare stories
Written by Carl Turner on October 16, 2018.
A trade war is raging between China and the US and the markets don’t like it. In the US, foreign trade policy from Trumps administration escalate tariffs on to Chinese imports, China is responding tit-for-tat fashion and the media, economists and trade experts are all churning out headlines warning of the economic dangers of this international stand-off. Here are just a few:
There is no doubt that the tensions and concerns stirred up by this trade war have got investors running scared. And that’s no surprise, it is pretty much par for the course with any bad economic news. But have cautious investors got it right?
Well, actually no. In these instances I always remind myself, and my clients, of this long-running joke:
Economic headlines have predicted 1000 of the last 3 market crashes.
It’s no surprise that the markets aren’t keen on this news - since stocks were invented, bad news has had a dampening effect on markets – but it would honestly be better for investors if they remained blissfully unaware of news such as this. Why? Because history shows us that investors pay a hefty price for waiting for more stable times to invest.
Remember 2008? The biggest economic crisis of our time when corporate giants such as Lehman Brothers were going bankrupt, unemployment was soaring and huge corporate behemoths such as General Motors and Chrysler were forced to go cap in hand to the government for a bailout? In March of that year the Dow Jones fell faster than at any time during the Great Depression.
So that was probably a good time to hold off investing...right? Wrong. The overall return of the stock market that year was around 28.7%, followed by 17.09% in 2010. The five year total return over the following five years was a whopping 135%. Anyone who played it safe and held their money in the bank during that time earning paltry interest as well as those who panic sold would have been kicking themselves five years later.
This is a pattern which has repeated itself many times over after seemingly cataclysmic events. It doesn’t get much more Armageddon than impending nuclear war yet in 1983 when the Cold War got particularly tense and fingers seemed poised to hit the nuclear button, it was a similar story. Stock markets clocked up a return of 22.66% that year and 93.44% in the following five years. Gains were also made in the years following the Arab Spring conflicts in 2013, the Gulf War in 1991 and revolution in the eastern bloc with the fall of the Berlin Wall in 1989.
So my advice to investors old and new is not to be afraid to invest whatever is happening in the world. If you wait for happier times, you might be waiting some considerable time. Today it’s a trade war, tomorrow it will be Brexit and who knows what events will be sent to test the markets over the coming decade. However, history has proved that long term investing in a balanced portfolio pretty much always pays off regardless of the short term volatility which occurs within the investment timeframe.
Ignore what the markets are doing, invest as early as you can, save regularly month by month, top up your investments at bonus time and consistently build a diversified portfolio of low-cost index funds invested for the medium to long term. If you have patience and the courage to ignore the noise, I promise, a decade or more from now, you won’t regret it!
If you would like to discuss your own investments, please get in touch at firstname.lastname@example.org.