Volatile Global Markets: 7 Steps To Steer You by Unscathed
What is going on in global stock markets? Pundits have hypothesizedv specific reasons for wild swings, such as America’s credit rating downgrade, consistent high unemployment, and declining consumer confidence. I will look more generically, and then suggest an approach for individual Registered Retirement Savings Plan (RRSP), 401K, or equivalent investors to ride out this storm.
The real issue is fear and uncertainty. Market players hate uncertainty. During volatile periods, investors will search everywhere for hope, regularly. And when they see a glimmer, investors rush in, and take off; only to exit after that hope is dashed!
Besides, investors are like sheep. When the market rises steadily, investors follow other investors and buy stocks and bonds, just because others are buying. This herd mentality leads to market bubbles such as the dot-com debacle. Then, folks realized late that they had overpriced excessively, stocks such as Nortel and Yahoo!. When these bubbles burst, a massacre begins. Panic and large-extent irrational selling starts, creating a value investor’s dream.
Generically, what is happening today? Uncertainty prevails in all major economies. European economies are in trouble. Major needed surgery in Greece will cause them to stagnate for years as they deal with results of prior heavy government involvement in the economy. Besides Greece, the EU rescued Portugal and Ireland. Now market players worry about France, one of the earlier rescuers. And let us not forget that in the UK, the coalition government has a huge task to sort out that messy economy.
And then, there is the USA. Spending beyond its method, divided legislature, in the midst of electioneering. This is a perfect uncertainty formula. So, fasten your seat belts and be ready for a bumpy ride for the next associate of years.
What can individuals do in this investment ecosystem? Be circumspect; reject the herd mentality. Specifically, here are a few steps that might help:
- Don’t invest if you have consumer debt, or a mortgage. Pay off these first and then start a capital fund.
- Avoid day trading; not only is it stupid, but it is insane. Stop, if that’s what you are doing.
- Develop a goal and plan. Why are you investing? Your reason will decide your investment strategy. Review the plan yearly or when conditions change. My preferred strategy is to buy equities with a long history of substantial fundamentals and dividend-payment. I keep up them, review the fundamentals regularly, and market fluctuations do not bother me, provided the long-term fundamentals keep. Remember, you lose, or gain on sale only, not when markets fluctuate!
- When your investments’ fundamentals change, confirm your strategy, and sell already at a loss. The market could be down for several years, like the Japanese market which has been below its bubble highs for over 20 years!
- Be proactive; know your risk profile, understand your portfolio mix, and think long-term. Don’t be influenced by generic asset mixes; you are rare, and your mix should fit you at your life stage.
- If you are in the retirement red zone, seven years to retirement, your goal must be capital preservation.
- Do not panic; although there is a point where, as in Japan, the market might not retrieve quickly. Focus on your goals and plan. They must be up-to-date and fit your needs and your risk profile.
One meaningful factor we forget is that USA consumer spending is about 70% of GDP. The Great Recession hurt consumers badly. Today, they will not rush to use recklessly as before. consequently, in economies like the USA that is not producing jobs, we should expect consumers with jobs to save, not use as earlier.
And so, Global, and USA economic growth will be slow. This is the logical consequence of earlier over exuberance that led to the most recent bubble. Beware; more government stimulus sounds like good politics, but merely will grow public debt rapidly. It will not grow the economy. Patience must be our mantra!
Copyright (c) 2011, Michel A. Bell