We live in interesting times...
You cannot switch on the TV or read a newspaper without hearing of doom and gloom. If it's not property and stock market falls it's oil prices going through the $100 level, and the situation in Iraq seems to be deteriorating.
Well, we will stay clear of most of that, except the issue of markets across the world going down. At this point we feel like saying please take a deep breath everybody.
It's certainly true that the 'sub prime' crisis has badly affected the confidence in the markets. Just as has the Northern Rock fiasco in the UK and the Bear Stearns collapse in the US. Are there any more 'nasties' around the corner people will rightly ask?
The answer is yes there could be, and things may take several more months for any residual problems to make an unwelcome appearance.
So what has happened?
Well, in a nutshell, it's partly down to greed.
In the last few years many banks have devised complex products to sell on at a profit, with the full ramifications of what they were selling not known at the time.
They packaged various types of debt together - good, average and poor quality - and sold it on. The banks priced these packages with a formulae devised by themselves.
With the benefit of hindsight, it could be argued that they got it wrong in spectacular style.
Roughly speaking, the high risk debt became worthless, the medium grade debt halved in value, and even the high quality reduced in value by circa 30%. This was made worse of course because in forced sales you tend to get less.
There is also the issue of how banks lend to each other, called the Interbank rate, so that they have the money to lend to people like us.
Gone are the days (but coming back?) when the bank used purely savers' money to then lend. So when confidence is hit, and banks are reluctant to lend to each other, and any lending they do do they charge a lot more for.
What we need of course is a period of stability, with bad debt being written off, and Interbank rates settling down. Working capital needs to be found, with wealthy companies called Sovereign funds helping - at a price.
As a background to all this, it must be said that the last 15 years have been quite amazing with low interest rates and high growth. This 'Goldilocks' period is ending, with growth down and inflation up. This brings to mind the dreaded word stagflation, and this is perhaps worse than recession.
Another point is that compared to other periods of stock market volatility the fall in the markets has not looked huge. Compared to the end of 2007 the FTSE is down around 14% and of course may fall further or recover. But in 1974 the market fell 51%, before bouncing back in 1975!
So what should investors do?
Well, if you don't need your invested capital now (or within 1-3 years) our advice is to hang on. Don't turn paper losses into real losses by selling low. We have seen new clients tell us that they have sold when the markets went down, and bought again when they went up.
Why?
Well, they simply felt that this was the 'sensible' thing to do.
This is the classic way for investors to lose money, time after time. For example, if you had missed the best 25 days out of the 7,300 days between 1986 and 2006, your compound annual returns would be 6.72% instead of the 11.74% the market returned.
Here is a recent article that discusses these issues:
http://tinyurl.com/3cucrb
Key Considerations:
The old adage of buy and hold is very true. If you do not need the money our advice is to hang on.
ACTION POINT
Perhaps inaction is a better way of putting it - ride out the storm.
If the volatility has really upset you, then revaluate if you should be reducing your risk here, or should you be in the stock market at all?
Related Articles
A Brand New Day in Trading
By: Terry T Leslie | 05/05/2008 | Investing
How can you tell the difference between the most successful traders and those who struggle to get by? It’s their attitude and their willingness to accept losses. As one of the most challenging businesses, trading requires a healthy balance between confidence and risk-taking. Setbacks and losses will occur, but to be a flourishing trader you won’t let these stumbling blocks bring you down. It’s not easy, but if you want to thrive, forget about today and face tomorrow fresh and new –
Can’t Stop Trading? You Might be Addicted
By: Terry T Leslie | 05/05/2008 | Investing
For many, trading is a passion. Successful traders love their job and feel a thrill when they complete a winning trade.
Can Knowing The Basics Of Bull And Bear Markets Keep Your Stock Trading Profitable?
By: Reginald T. Hobbss | 21/05/2008 | Finance
The stock market is called a 'bear market' when it moves downward for a length of time. When the market moves up, it is called a 'bull market'. A poor stock is called bearish and a stock that is succeeding is called bullish.
Bear and Bull terms are used to refer...
1929 Stock Market Crash
By: Arkaitz Arteaga | 27/08/2008 | Finance
Some economists regard the 1929 stock market crash as major contributing factor to the great depression. The speculative boom of the 1920's caused the crash because of the build up of the economic bubble. The bubble was formed because in the 1920s, as the stock prices were increasing, many people...
How to Make Money in Real Estate Investment with Lease Options
By: Nofie Iman | 31/08/2006 | Investing
Nowadays, many gurus and real estate investment websites are almost entirely devoted some investment strategies that actually are not investment strategies at all: lease option. A lease contract puts you in immediate control of a home as far as occupancy is concerned.
Be Wary Of Penny Stocks
By: Darren Mclaughlin | 05/02/2006 | Finance
They may seem cheap, but you need to do your research when it comes to low cost stocks.
Penny Stocks: The Hype vs. Reality
By: Joel Arberman | 16/04/2006 | Finance
Many investors race towards penny stocks and the allure of high returns. Are the returns real or a myth?
Clearing Up Myths About Penny Stocks
By: Jason T. Brook | 19/06/2006 | Investing
Learn the truth about some of the most common myths surrounding penny stocks.
Got a Question? Ask.
Ask the community a question about this article:
Frequently Asked Questions
How can someone redeem Wyndham hotel points for ...
By: fortfmiv | 26-08-2008
How can someone redeem Wyndham hotel points for cash?
Compensation for fall on water
By: maureen | 26-08-2008
I just came from a mediation in miami fl. (I live in Pa.) This is all new to me since I have never had been involved in a lawsuit in my life. I was in with the attorney for the cruise line for about 8 hours, and the next day they depositioned my husband. (his only took 2 hrs) I just got a call from my attorney in miami today telling me the mediation is set for 10/3/2008. I did get hurt, i Slipped on a pile of water in the salon, and I have never been the same since. I now use a cane, I have a hospital bed in my room, and I have been to so many doctors since 5/07 and all they do is medicate me. I have numbing in my spine and my lower left back is always killing me, I use the cane because my left leg has gone out twice. I would just like to know what the mediation will bring? What will they offer me? I have already laid over $11k out of my pocket for medical nessecities. If any one has a clue on what kind of money they will offer me I would appreciate it. Or should I take it to a jury?
Jmowb110@aol.com
Who's In Dubai
By: AB | 26-08-2008
I've heard a lot lately about Dubai. What makes Dubai so hot?
Allied Dollar Stores?
By: Mark | 26-08-2008
Does anyone have any information about or experience with Allied Dollar stores (based in Las Vegas, Nevada, USA)?
Looking for value
By: Airianna | 26-08-2008
Hello -- I have the bow part of an Otis sterling bow necklace.
it is signed.
I want to know if it is worth anything?
Anheuser Bush sellout to In Bev, capitol gains and Chartiable Gift Fund
By: Linda | 26-08-2008
i have owned 1800 shares of Anheuser Bush for 18 years. With the cash buyout approaching fast, is the Fidelity Charitable Gift Fund a good thing to put some of of my capitol gains in?
Q&A Powered by:
More from Ray Prince
Saving Money From Income - are You a Saver or Spender?
By: Ray Prince | 15/07/2008 | Finance
It certainly looks all doom and gloom at the moment doesn't it? Open any newspaper or tune into the news on TV and if you are anything like me, you get punch drunk with all the articles on how bad the stock market or property market is etc etc. It may seem perverse then to write an article on savings!
Investing in Money Market Cash Funds - are They a Wise Option?
By: Ray Prince | 12/06/2008 | Finance
When it comes to investing your money, you'll probably know by now that you have numerous options to choose from. In fact, it can feel like a bit of a minefield and sometimes you may not know if you've made the right choice. Should you choose a bond fund, equity fund, property fund or a money market cash fund? Or any other type of fund? So, what is a Money Market fund?
Dentists' Provident Society - Income Protection Claim Statistics
By: Ray Prince | 23/05/2008 | Finance
If you are a dentist, it's likely that you've taken out income protection insurance (also referred to as permanent health insurance). In fact, you may have even claimed on your policy. During the last few years many of the leading insurers have been releasing their claim statistics for critical illness cover and income protection.
Financial Sales Vs Financial Planning - What You Need to Know
By: Ray Prince | 13/05/2008 | Finance
One of the challenges we face as Fee Based Planners and Wealth Managers is how do doctors and dentists get to know about Graeme and Ray and the job we do? After all, we know (and our existing clients tell us), that we are providing our clients with exactly the kind of service they want, and they love the way we work for them and not the product provider.
To Sipp or not to Sipp? - More Pension Options Explained
By: Ray Prince | 21/04/2008 | Finance
We have been seeing a lot of enquiries from clients wanting to know if a Self Invested Personal Pension (SIPP) would be appropriate for them. Let's look at an example to illustrate this. Let's say you have several personal pensions, some separate share investments and an investment property. How can you use a SIPP to invest in the shares and the property?
Avoiding Inheritance Tax - Planning for the Informed
By: Ray Prince | 31/03/2008 | Finance
Many clients have accumulated substantial funds within ISAs and PEPs over the past 10 years and enjoyed significant tax breaks in the process. It's not unusual to see clients with capital in PEPs and ISAs in excess of
Spanish Property - Wealth Tax & Inheritance Tax
By: Ray Prince | 12/03/2008 | Finance
We have many clients who have either bought in Spain or the Balearics, or are thinking about doing so. In the past few years, there have been some changes in how the Spanish government tax those who are UK based and have a Spanish property, although with a change of government this could alter again. Here we will look at two aspects - Wealth Tax & Inheritance Tax.
Stock Market Timing - Should You Bother When You Invest?
By: Ray Prince | 07/03/2008 | Finance
At the time of writing this article the Markets are showing great signs of nervousness and probably should be on Prozac. The problem is that the Markets are uncertain as to the future and therefore have bouts of pessimism followed by optimism followed by pessimism again. Consequently, we see big swings in daily prices of securities.
Finance 
