Crisis Overseas Taking Investors on Wild Ride

By September 18, 20152015, Money Moxie, Newsletter, Viewpoint

This July, the Lagoon amusement park in Farmington, Utah, opened its most thrilling ride ever: Cannibal. This coaster reaches 70 mph. It includes a 208 foot drop and 3 vertically inverted free-falls. The L.A. Times rated it 2015’s 20th best ride in the world!*

Honestly, I haven’t been on the ride, yet. I have found plenty of excitement this summer in the stock market as it has risen and fallen with news from overseas.

The market often feels like a roller coaster and it seems like it has been steeper lately. As our economy has improved, others have faltered, particularly China and Greece.

We know that over long periods of time the U.S. markets have been good at dropping investors off higher than where they started. So, the key for us is to get on the ride correctly and stay seated until it is over.

Diversification Is Our Safety Belt
One of the first things we do on a roller coaster is secure our restraining device and keep it on during the ride.

As investors, we live with uncertainty and we expect to be rewarded for it. Deploying a globally diversified portfolio can help us capture more opportunity.

Greece is a long way from the United States, but it has had a large impact on our daily stock market returns this summer. Greek debt is twice as big as its economy and growing. In the entire world, only Japan has it worse. (U.S. debt is approximately equal to its economy.)

As part of the European Union (E.U.), Greece has received more loans just to service the payments on the existing ones. In return, the Greek government has been forced to cut spending and raise taxes (ingredients not typically found in a recipe for economic success).

What’s next for Greece? Its economy is deteriorating, but I expect the alarm will quiet down for a little while. In the coming years, the Greek crisis may return.

Fortunately, the United States is an economic leader, not a follower. The Greek crisis is unlikely to drag us down. Its economy represents 2 percent of that of Europe and just 0.28 percent of the world’s.

Learn to Love the Dips
The twists and turns of the ride can be unpredictable, but we know where the roller coaster ends. Loving market declines may be asking too much from any of us.

If we truly believe the market will be higher years from now then we should view every short-term drop as an opportunity to buy low. So, stay in your seat and if you really want to prosper in a crisis, try the Warren Buffett way and buy more during the dip.

It also helps to remember that the stock market is not the economy. The market goes up and down daily on all kinds of news that may seem important, but does not fundamentally change the economic future.

Over the last five years, China has had one of the best economies in the world and one of the worst markets. In the last year, its economy has slowed from 7.5 percent growth to just 7 percent. (The U.S. economy is currently growing at 2.8 percent.) In response, the Chinese stock market is down almost 30 percent since June.

The Chinese government often states that “confidence is more valuable than gold.” So, even though it sees this bear market more like an interruption than an economic emergency, it is trying to stop the drop. Will government efforts to control the free market work? It is doubtful. Expect more news of volatility from Asia in the coming months. Over the years, look for the economy to continue to grow and the market to eventually follow.

Investing can be a wild ride. There are days, weeks, and months that can be difficult. So keep your arms and legs inside the ride at all times and hold on! Unlike a real roller coaster your long-term, diversified investments should help you end higher than where you started.

 

*Brady MacDonald, “32 Best New Theme Park Additions of 2015,” L.A. Times, December 14, 2014.
Research by SFS. Data from public sources. Investing involves risk, including potential loss of principal. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

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