U.S. Markets Tumble as Fear Spreads – Stocks Post Worst Loss in Seven Months as Investors World-Wide Confront Pullback in Stimulus, Growth Worries.
U.S. stocks tumbled Friday to their biggest loss in more than seven months, extending a global sell-off that investors fear signals turmoil to come as financial markets adjust to a pullback in central-bank stimulus. (Source: Wall Street Journal – Saturday, January, 25th, 2014)
Reading headlines and text like this can be frightening. The average investor, concerned that they won’t have enough to make it comfortably though retirement can be easily jarred from complacency and motivated to DO SOMETHING to protect their investment assets from being decimated.
However, let me remind you that, as much as I love the Wall Street Journal, their job is to get my attention and get me to read their content – “Eyeballs glued to the screen”, as a friend of mine likes to say. If I’m not grabbed, I won’t see their ads. The media loves this stuff. Calamity, or apparent calamity, draws attention. You have to remember, however, that the market doesn’t have a memory. Stock prices are a response to what news is coming out at any moment in time. If the news is worse than expected, then prices adjust downward. If it’s better, then they go up. No matter how sensational, remember that even the best informed media outlets don’t know the next moves of the market. Let give you just one example of a headline that I use in a workshop on investing that I teach every month. (This is just one of many.) “GROWING GLOOM: A SEVERE RECESSION MAY BE DEVELOPING, MORE ECONOMISTS SAY” Wall Street Journal – October 10, 1990. Pretty scary headline, isn’t it? A recession means we’re headed for a slowdown in economic activity. That should mean a big drop in stock prices. Let me remind you that this headline appeared after a record run-up in stock prices in the 1980’s. Large US stocks were up over 400%. International stocks went up around 700%. We often are led to believe that such long streaks should inevitably be followed by big declines. So what happened over the next year?
Over the next 12 months, the S&P 500 went up up 33.5%. US small stocks shot up 56%. I’m guessing that people who got scared out of the market were probably a little shocked and wished they could turn back the hands of time. Unfortunately, that is not an option in our world. This is why investors need to be educated. The world is complex and many of the usual sources of financial information aren’t always in place with your best interest at heart. Remember: The: stock prices really don’t have a memory. At any point in time, there is a 20 to 30% chance they will go down. That is the nature of risk and the reason that stock markets, historically, provide higher returns than fixed investments. Keep in mind that changes in your investment portfolio should only be gradual or motivated by big change in financial circumstances – not by scary headlines.
