Without fail, we are constantly asked how we believe a certain event will affect the markets anytime a conflict hits the headlines. As investors, we tend to look for answers and meaning in every single gain or loss in the markets. Unfortunately, that is simply not always the case.
On any given day, when someone asks why the market went up, or why the market went down, our answer is quite simple; there were more people buying that selling, or vice versa. It is imperative that investors realize that day to day market swings will have a minimal if not inconsequential impact on your retirement savings.
While we have used the following example in the past, let us look back to September 11th, 2001. Following the attacks on the Twin Towers, the Dow Jones dropped almost 15%, but rebounded back to its old level in just 2 months. Similarly, after Iraq invaded Kuwait in 1990 the Dow Jones dropped by almost 20%, but recovered entirely within one year.
Investors tend to give “one and done” events more credence than they deserve, believing that these singular events will result in market crashes. We have heard similar theories applied to the conflict between Russia and the Ukraine, or the uprising in Venezuela. There are certainly opportunities to make money given these short market moves, however it is more likely that uncertainty will result in a temporary downswing in the markets. In the long run, markets are not shaped by events, they are shaped by environments.
For example, we previously demonstrated how the Dow reacted and rebounded to the September 11th attacks and the Iraq/Kuwait conflict. Now if we take a look at the Credit Crisis in 2008, it took stocks and investors a few years to recover losses and gain the confidence to get back into the markets once again, and that drop in value was not predicated by a single event; that was the result of lax monetary policy, poor interest rate policy and an unregulated derivatives market. Macroeconomic trends are what investors need to be looking at, not short term onetime events.
Understanding the psychology of investors is an incredibly difficult task, and it can be difficult to put fears and concerns stemming from short term events in the back of your mind. We always remind clients that investing is like driving a car; you may hit a pothole here and there, but if you spend too much time studying that pothole through the rearview mirror, you will miss the bend in the road and drive straight off the cliff.
Remember, events do not shape markets, policy and economics do.