Brutal; that is the only way you can describe how the markets began the New Year. Across the board, markets were down on average six percent during the first week of 2016. This makes it the worst opening week on Wall Street in history. Of course, the news is full of doom and gloom and as a result, investors are nervous. That is why I think it is important to take a step back and understand what is happening before you decide to make a move. Always remember, one of the keys to successful investing is not letting short-term comfort cause long-term pain.
If you take a step back and analyze what is happening, it is clear that the main reason for the downturn has been China. China has been the fuel that has driven the world’s growth over the last number of years. China, whose economy has been growing at an incredible pace, has started to slow down. As a result of this slowdown, the markets have had an adverse reaction. It’s not that we didn’t know that China was slowing, but it seems that every time there is a new report that confirms China’s slowdown, markets are adversely affected. It is important to understand we are in a world economy and China is the second largest economy in the world. When the Chinese economy slows down, it has a domino effect throughout the world.
The other major reason for the market selloff has been oil prices. Oil prices continue to fall. In fact, oil prices are now around $33 a barrel, where they were in 2004. Falling energy prices is a double-edge sword. As consumers, we love the fact that we can fill up our tanks at less than two dollars a gallon. However, the other edge of the sword is that many economies throughout the world are dependent upon energy prices, including ours. There have been numerous oil wells throughout the United States that have been shut down because of low energy prices. As a result, jobs are lost and local economies are hurt.
As investors, the question we’re always faced with it what do we do. Do we sell out and wait it out or do we stay the course? My problem with selling out is then what? Do you leave your money in cash that is virtually paying nothing when in fact, you are losing purchasing power because we know the cost of living is going up much faster than the return you’re getting in the bank. It would be nice if we can get out of the market when it’s retreating and get back in when it starts going up. The problem is that’s nearly impossible to do. Markets in today’s world can change direction relatively quickly. After all, let’s not forget that last August we saw a 10 percent correction and over a short period of time markets bounced back. As I’ve said many times in the past it is impossible to time the market because good news is bad news and bad news is good news. When you attempt to time the markets you have to be right twice; once when you buy and once when you sell and no one has been able to do that consistently.
The other course of action is to stay the course and continue to do what you have been doing. As far as I’m concerned, for investors who have well-balanced and diversified portfolios based upon their individual goals and objectives, market retreats and market corrections are the norm. Reality is that markets are always volatile and as investors we have to accept that. The reason that investors need a game plan is for times such as these.
I know it hurts when the market goes down. After all, I am an investor and when markets retreat my accounts retreat as well. However, I remain focused on my goals and objectives and not where the market is at any given point in time. Markets are volatile and they are fickle, but my goals and objectives are not. That is why I believe if you maintain focus during these turbulent and volatile times, over the long run you will prosper. On the other hand, if you try to constantly time the market, you will find that you are no different than the hamster on the wheel, you run and run, but in the long run you’ve gone nowhere.
There’s no doubt there are lots of moving parts in today’s economy. Whether it’s China, oil prices or what’s up with the Federal Reserve. There are so many issues that it’s hard to keep track of. However, for investors the focus should always be on their individual situation and their individual goals and objectives. If you focus on these items, you will find that over the long run, you will be a successful investor and ultimately have more money in your pocket, exactly where it belongs.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at email@example.com.