The stock markets have dropped significantly in recent weeks. What are our thoughts?
Through the end of April, 2010, there had been a significant difference between the performance of US stocks markets (positive) and International stock markets (negative). The difference, depending on the asset class, was between 5-20% (meaning the best performing US asset class may have had a 20% better return than a poor performing international asset class).
Quick thoughts on that? Diversification is always working. It is impossible to know which asset class will outperform another. These are themes that we continuously focus on.
Other events have further caused significant gyrations in the worldwide stock markets and commodities. The economic crisis in Greece and potentially other countries in Europe are certainly the root of much of the markets’ declines during 2010. While in late 2009 indications of problems in Greece were beginning to appear, it is events such as these that provide further evidence of how difficult it is to make accurate market predictions and investment decisions based on “having a crystal ball.”
Late in 2009, most forecasters were predicting greater inflation in the US, based on governmental spending that was causing even greater budget deficits. So…..the Wall Street Journal blared last week in a huge headline that the most recent inflation statistics were at a 42 year low!
Most economists predicted rising interest rates and higher mortgage rates for 2010, to correspond with the expected rise in inflation along with the Fed’s moves to stop purchasing mortgage backed securities in spring, 2010. So….interest rates have declined during 2010 and mortgage rates have decreased, not increased.
Gas prices have dropped, based on expected declines in economic activity, stemming from the problems in Europe. Few would have predicted this decline, as no one could have predicted the oil spill. One would think the oil spill would cause reduced oil supplies, which would increase the price of gas. For now, that has not happened. At the same time, the reduction in gas prices will help to limit or reduce other inflationary factors.
The impact to our clients and our investment strategy?
We are focused on long term investing, not short term market predictions and reactions to short-term market activity. We are not changing our investment strategy based on these market movements. As part of a client’s long term investment plan, we may view the market decline as an opportunity to BUY stocks, if a client’s allocation to stocks has decreased below their planned allocation to stocks. In other words, as disciplined investors, we would recommend buying low (even though we don’t know whether the market will go higher or lower in the short term).
The key are the discussions that we have with our clients, both when we develop their investment plan and possibly now, when they may be concerned about the recent market declines. As we did during the declines of 2008 and 2009, we talk and discuss the markets. We listen. We counsel our clients to focus on their goals. As part of the plan we developed, the money that is allocated to stocks is not expected to be needed for many years. If this is so, then the movements of today become less of an issue.
Although we clearly are concerned about many of the economic problems throughout the world and in the US, we remain optimistic and positive for the long term. Our economy and the world are resilient and that solutions and innovations continue.