“World stock markets have rounded off a wild and difficult year,” the article began, pointing to multiple uncertainties in a polarised US political system, a crisis-ridden Eurozone and a rapidly slowing Chinese economy.
Does that sound familiar? That was from a calendar year wrap–up of markets published by BBC News on 30 December 2011, more than seven years ago.(1)
The report itself was accurate enough. In fact, it was a fair reflection of some of the sentiment dogging financial markets at that time.
The US had lost its ‘AAA’ credit rating that year after a congressional deadlock over the debt ceiling (which also sounds familiar). In the Eurozone, the focus was on the heavily indebted members Portugal, Ireland, Italy, Greece and Spain and the future of the currency union. In China, the government was clamping down on lending and investment to cool inflation.
Now, seven years on, markets confront trade tensions between the US and China, the fate of Brexit, domestic political polarisation in the US, the rise of populist movements in Europe and sundry geopolitical flashpoints.
Yet, in the time between the 2011 headlines above and the current ones, global equity markets have risen substantially.
To be sure, those returns over seven years have not been distributed evenly. In 2018, for instance, global equity markets were negative, while in 2013 they gained by close to 28%.
But the point is that markets do not move in a straight line.
News travels quickly and prices can adjust in an instant, up or down. When there is more uncertainty, there is often more volatility. Individuals who seek to anticipate what markets will do next based on today’s news just add unnecessary anxiety and risk to the process.
By necessity, the media’s horizon when it comes to financial news is very short term. If you are publishing in real-time, your need for fresh material is insatiable. It’s not that these headlines are wrong. But for an individual investor, whose horizon is measured in years or even decades, day–to–day news is less relevant. This means that while the daily news flow may be worrying at times, it pays to reflect on the fact that capital markets have rewarded long–term investors. For this, what is required is discipline and a focus on the elements within your own control.
None of us can control the news and the daily ups and downs of markets. But you can build an investment plan that fits your needs and risk tolerance. You can structure a portfolio built around the long–term drivers of expected returns. You can diversify globally, and you can manage your expenses, turnover and taxes. Finally, you can manage your own responses to the news.
Michael Beech CFA is an experienced investment specialist and is responsible for providing investment advice as well as managing the investment portfolios for many of Alliott NZ's clients. Click here to read more or call Alliotts in Auckland today on 09 520 9200.
1. ‘World Stock Markets End Tumultuous Year Well Down’, BBC News, 30 December 2011