As Donald Trump and North Korea’s Kim Jong-un keep threatening to have a showdown, the press cannot help but to sensationalise these events in-order to try and predict how the stock market will perform or justify how the markets have performed. It is surprising how potential events in Guam are having significant interest across the world. Here are a few headlines from the past few days:
“Stock strategists see possible 5% correction before this selloff is over” – CNBC
“Stocks bear brunt of market reaction to North Korea stand-off” – Financial Times
“European Stocks Torpedoed, Gold Pops as Investors React to Trump’s ‘Fire & Fury’ North Korea Threat” – The Street
“European stocks log worst week in 9 months on U.S.-North Korea tensions” – Marketwatch
“Swiss franc, yen rise as North Korea tensions brew” – Reuters
Such headlines can have a detrimental impact to portfolios if investors feel like they need to do something and are moved to take action. The last thing to do in such situations is to start trading your stocks; which could result in selling low and buying high. Instead, the astute investor should have a long term horizon, stay the course and have a low information diet. In fact, some opportunities to buy lower priced stocks could open up.
All this reminds me of the now infamous Newsweek cover story “The Death of Equities”. This article was published on August 13th, 1979, at a time of high inflation and declining markets, when it seemed like there was no hope for stocks. Ironically, publication of this story seemed to mark the start of one of the greatest bull markets in history. This is further evidence that the so called experts are not always right when it comes to economic matters.
Other countless similar headlines and predictions have come and gone across the decades, from the 1987 market crash, dot com bubble and bust, subprime lending crisis, wars, Eurozone problems, oil price woes to geopolitical issues in the present day. Those investors who did not panic, but took advantage of the opportunities presented to them would have done extremely well. As an illustration, here is how the UK FTSE 100 index has progressed since the early 1980s, through a selection of these events.
Despite all these major events, along with the accompanying media attention, massive stock buying and selling, the market has maintained what it always does in the long run; keep growing. This is why it is recommended to invest if you anticipate to be involved for a minimum of 5 years. Anything can happen for shorter time periods and huge drops of up to 50% could occur. Fortunately, historically these movements have been very rare, though the Intelligent Investor would view these as gold is raining down.
Recovery can also take long time, therefore holding a good emergency fund in safer assets such as cash or cash equivalents is important. A good asset allocation between stocks and bonds can minimise portfolio volatility. Having such diversification, will enable investors to rebalance their portfolio as required, which can allow them to buy low and sell high.
Have a long term approach, worry about more important things and avoid looking into your portfolio furtively. As Vanguard founder, Jack Bogle, says ignore your impulses and noises from mr market.
My favourite joke/ advice of Bogle is “when you get your retirement plan statement every month, don’t open it. Don’t peek. When you retire, open the statement and believe me if you’ve been putting money in there for 40 or 50 years, you’ll need a cardiologist standing by you when you open it.”
So if you are thinking of selling your investments due to this apparent face-off between some egoistic world leaders, the advice is to sit tight and think rationally.