Investors, Don't Panic, Everything's Going To Be Okay
Isn't it nice to hear some reassurance during a recession? Especially when the headlines have been doom-and-gloom for months. And it's true, we'll weather this storm, just like we've weathered every other recession for the past 80 years. If you're a long-term investor, your portfolio will recover.
You don't have to take my word for it, I wouldn't throw that kind of statement out there without providing you with some history and data to back it up. Hopefully this article will help you get some untroubled sleep tonight.
Don't believe the hype
The major media outlets are doing what they do best, painting this as the worst disaster in US history. Why? Because it sells papers, draws television viewers and attracts mouse clicks. The scarier the headline and the more dire the prediction, the more successful the story. Thirty years ago, we would have condemned any news journalist that used these kinds of irresponsible scare-tactics. Today, the news is forced to compete with other forms of media, so the line between news and entertainment has become very blurry. As a result, we've become accustomed to outrageous (often ridiculous) predictions of disaster and worst-case scenario analysis from people that we consider to be "newscasters" and "analysts".
We've all become a bit more cynical when it comes to the media, but it still takes a toll when all you see for months are predictions of disaster. We see our portfolios taking a beating, and this puts that little nagging doubt in the back of our mind "could everything they're saying be true? Is this the beginning of a 10 year global depression?" To compound the problem, it's human nature to try to one-up the competition. The negativity feeds on itself, today's headline is always going to be worse than yesterday's until the economy and the market start to recover.
Mass media is an EXTREMELY poor predictor of future events. What happened yesterday and what's happening right now is the focus, the media is reactionary so you can count on the forecasts to always lag the actual market recovery. Take a little of Warren Buffett's advice to heart, "attempt to be fearful when others are greedy and to be greedy only when others are fearful." If the media is crying that we're on the brink of total collapse buy.
People are fleeing the market in droves, financial institutions are imploding left and right, we're embroiled in two costly wars, the dollar is weakening and inflation is much higher than it's been for a long time, right? I don't disagree with any of those statements, they're all facts.
How can I say things aren't so bad if I agree that all of those things are true? Because this is a recession, and things are always tough in a recession so I see no reason why this one would be any different. This is an inevitable part of the business cycle, albeit the most painful part. Every economic boom requires a bust at the end before the cycle can start over and we can experience the next expansionary phase.
But isn't this worse than all past recessions? Nope, it's milder than some and worse than others but it's far from the worst. It only feels that way because you're losing money. Stay objective, and when you start having doubts, let history be your guide.
So how about some history when have Americans faced greater challenges?
~ Our worst economic disaster was the crash of 1929. Back then, we were an emerging market. Ever own an emerging market stock? They define the word volatility. The crash of '29 and the 10 year depression that followed were dark times in America for the rich, poor, and everyone in between. In contrast, today we are the most developed economy in the world and we have sound fiscal and monetary policies, which is why our expansion periods (bull markets) are so much longer than our contractions (market corrections and recessions).
~ The 2000-2002 Tech Wreck was scarier than this recession. The scariest part of the tech wreck for me occurred right before the crash. Do you remember the euphoria in 1999 and early 2000 near the end of the greatest expansion that the US stock market had ever experienced? Pundits claimed that the tech boom created a new paradigm in business, "we would never have to experience another recession again because of the exponential growth potential of technology companies". That sounded like complete insanity to me and the crash that followed proved that people often lose their objectivity during strongly bearish AND strongly bullish conditions.
~ 9/11 was scarier than this recession. Prior to 9/11, most Americans spent very little time worrying about our national security. Terrible things happened in other places, they didn't happen here at home. On that fateful day, we were introduced to terrorism on an unprecedented scale and it happened on American soil. Our illusions of complete security at home were shattered in an instant and the market plummeted. At the time, we had no idea how deep or painful the economic and political fallout that followed might be. The fact that the market recovered only a few months later is a testament to America's will and resilience.
~ Black Monday was scarier than this recession. On a random Monday in 1987, the stock market experienced its worst one day drop in history, it plummeted over 20% in a single day. I doubt many brokers, serious investors or retirees living off of their portfolio slept well (or at all) that night. There was no logical explanation for what happened, and to this day, people still argue over the cause of the crash (for the record, I blame program trading!). Nerves were frayed for months afterward and market volatility reached unprecedented new highs as investors jumped in and out of the market trying to avoid being part of the next massive selloff.
~ Stagflation in the 70's was scarier than this recession. Stagflation was baffling for investors and economists when it first occurred in the 1970's. How could we be experiencing stifling inflation while we were also experiencing a prolonged recession? Theorists worried that recession coupled with inflation could only lead to one logical conclusion, a complete economic meltdown. At the time, there was no historical data to refute that conclusion. Of course, that didn't happen, but it sure created scary market and economic conditions for several years.
Those examples may have provided a little comfort but, personally, hearing how things could be worse never really makes me feel better. I'd rather hear why things aren't as bad as they seem, so here are a few historical investing facts that help me sleep like a baby
~ Every 10 year period since the end of the depression has produced gains. This is even true RIGHT NOW. That's right, even though we have the current recession and the tech wreck of 2000-2002 lumped into the mix, diversified long-term investors (such as those holding S&P 500 Index Funds) from 1998-2008 have a gain.
~ In the last recession, we faced an INVESTING bubble which created a valuation crisis. Since I'm an investor rather than a real-estate speculator, I'll take a housing bubble over an investing bubble any day. When the tech boom ended in 2000, every major index was sitting at a record high and stock valuations were through the roof. We were facing a valuation abyss, most stocks in the technology-laden NASDAQ were trading FAR above normal or realistic P/E ratios. We had a long way to fall back then, but we are in a very different position today. Did you know that the S&P had barely made it back to the levels of the late 90's before this recession started? We don't have that monkey on our back this time around, stocks are already starting to look pretty cheap from a valuation perspective, even to the bearish pessimists.
~ Today we are facing a HOUSING bubble, but comparisons are starting to overshadow losses. The major banks are experiencing massive losses as a result of questionable speculation and sloppy sub prime lending. What we have working in our favor is that comparisons are starting to look pretty good. The largest bank (no longer the largest) suffered a $10 Billion loss in Q4 '07 and a $5 Billion loss in Q1 '08. Analysts predicted that they would lose $3.1 Billion for Q2 but they beat expectations by only losing $2.5 Billion. In the last six days, the stock has gone up 43%. Wait! After announcing a $2.5 Billion loss the stock is UP? Comparisons are powerful and the media will almost always focus on recent performance, they rarely look further back than a year.
~ First Movers are starting to pour money back into the market. The financial sector has been beaten down the worst during this recession, and many companies are simply suffering from guilt by association. However, those that weren't involved in the worst of the risky speculation or sloppy sub-prime lending are now being rewarded. For example, JP Morgan has had decent volume for a couple of months and their stock price is almost back to break-even for the year. First movers are snapping up the best bargains.
Bottom line, this recession will inevitably end just like those that came before it. I'm not an oracle or an expert, and I have no idea when this recession will end, but I still feel comfortable telling you that "everything's going to be okay". The market can't always go up, it needs cooling off periods. The cooling off periods that are particularly steep, prolonged and painful are called recessions. We're experiencing one right now, but it's not the first or the worst and it won't be the last.
Stay objective, stick to your long-term investing strategy, and ignore the headlines and short-term market volatility. Buy and hold and hold and hold and in the future, when you're reading euphoric predictions of never-ending bull markets or dire predictions of decade-long global depressions, trust history, if you're a long-term investor, your portfolio will recover.