Should We Fear Global Uncertainty?

Recent “cataclysmic” events will be approximately the fifteenth time the world was supposed to end since 1981, when some individuals at my financial planning firm began their careers as financial advisors. Think about all the crises that have happened and been predicted over the years. Thirty years ago, a Utah man became popular by predicting an earthquake that would devastate the entire earth. He had it nailed down to the very year. Hundreds of his followers in Utah added earthquake coverage to their homeowner’s policies. The earthquake never came. At least insurance companies did well.

With the one-day decline in the stock market on October 19, 1987, again, the world was coming to an end. Three months later it had totally recovered. Other crises occurred in 1982 (global credit crunch), 1989 (junk bond collapse), 1994 (bond market massacre), 1998 (Russian currency crisis), 2000 (Y2K), 2001 (tech bubble), 2008 (sub-prime loan crisis), and 2010 (foreign debt crisis), just to name a few. During the last thirty years, many Cassandras have regularly issued their dismal prognostications. Sometimes an event occurred that temporarily fulfilled their dire predictions. Yet, the economy and market always recovered.The world continues to turn and function. It can be very dangerous to follow the advice of doomsayers. If you had been out of the stock market the last 30 years, you would have paid a very high price. The S&P 500 closed at 122.55 on December 31, 1981. It’s now above 1300.

If we have learned anything about the stock market during the last thirty years, it is that the greatest risk doesn’t occur when fear is rampant. The most dangerous environment is exactly the opposite: when people are wildly optimistic and buying any investment in sight. Those are the times when risk is the greatest. The building of the tech bubble in 1998 and 1999 is a prime example of this infectious group mentality.

The challenge for investors is to step aside and develop the ability to view world events and market activity apart from the crowd of human sheep. Granted, this is easily said but very difficult to do. Remember that your feelings are most likely the same as everyone else’s. Unless you develop the skill of isolating your emotions from those of the vast majority, you will become a market timer who buys high and sells low – not a good strategy for making money.

The recent events in the Middle East and the earthquake in Japan may have triggered a “correction” in the market that was long overdue. A correction always has a triggering event, but we should remember that the “event” is an excuse, not a cause. What was the market psychology that existed when Middle East tensions erupted? Were investors buying any and every stock with reckless abandon? Was the market greatly overvalued? No — none of these conditions existed. By answering these simple questions, we can conclude that recent events didn’t signal the emergence of the bear from his hibernation. Last year, we had the “PIIGS” European debt crisis. Despite that event, the market did very well in 2010.

History has shown that human beings have remarkable resilience and an amazing ability to overcome catastrophe. People pull together and solve problems. The Chinese character for crisis contains two parts: one is danger, the other is opportunity. People deal very well with poverty and trials. What they can’t handle well is success and wealth. A patient, long-term view is the price investors must pay to profit from the stock market’s attractive returns.

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