As we end a year to forget, investors and analysts are wondering how to weather the bear market in equities. While the U.S. has a healthy economy, 2018 saw the U.S.-China trade war rapidly escalating and the earnings of many global companies suffering as a result. With the U.S., short-term interest rates also on the rise and stock markets around the world have had one of the most volatile years in recent memory. It would be too optimistic to expect the major indices, i.e., S&P 500, Dow Jones Industrial Average and Nasdaq Composite, or their popular Exchange-traded funds (ETFs) — the S&P 500 ETF (NYSEARCA:SPY), SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) or the Powershares QQQ Trust ETF (NASDAQ:QQQ) — to recover quickly and fully. The same goes for many individual stocks.
This is especially true when you consider that the equity markets might already be pricing in a U.S. economic slowdown. Amid all the noise, it is not easy to know where in the economic cycle significant economies of the world truly are.
Today might be an appropriate time to remind ourselves that choppiness and downturns have always been a reality of financial markets. Most investors have at least heard of several of the famous historical bubbles and stock market crashes.
These past financial crises, which significantly impacted investors at the time, include the Dutch Tulip Mania of the 17th century; the South Sea Bubble of the 18th century; the British Railway Mania of the 19th century; the Florida Real Estate Bubble of the 1920s; the Wall Street Crash of 1929, which lead to the Great Depression; Black Monday in October 1987; the collapse of Barings Bank in 1995; the dotcom Bubble in the late 1990s; the lows reached following the September 11 attacks and finally the financial crisis and the bear market between 2007 and 2009.
I enjoy reading about the history of the financial markets. The story of each bull or bear market may initially look different, but it really isn’t. After all, human psychology never changes: fear and greed are the two emotions that drive investors to the extreme. In other words, crowd psychology always impacts financial markets.
Market Timing: A Costly Attempt?
The common denominator in all of these market downturns has been that it is almost impossible to know when exactly they will start or end. It is tempting to think we are somewhat better than the investor next door, especially when it comes to predicting the market turns. But it is rather difficult to keep a cool head when the value of our portfolio is falling and the news is full of doom and gloom.
In other words, individual investors are usually wrong when attempting to time the markets. If they act on their emotions and sell at the height of the panic, then those investors potentially miss out on the gains when the markets recover — and yes, markets do recover.
Most of Us Are Long-Term Investors in the U.S. Markets
Let’s also remind ourselves why we invest in equities. We aim to build a safe nest egg, especially for retirement as well as for emergencies that life may throw at us. Financial advisors, investment professionals and seasoned investors all agree that patience and keeping a steady hand is crucial in building an investment portfolio made up of fundamentally solid stocks. Many successful investors believe in holding shares for the long term.
The U.S. has always been at the forefront of international financial markets, innovation and productivity. Eventually, the dust will settle in the equity markets, and strong shares will once again shine. Until then, investors need to stay focused and disciplined.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.