We’ve been here before
The Dow Jones fell by nearly 1,200 points in a single day on Feb 5 and while this figure is somewhat impressive, in percentage terms (4.6%) it is nowhere near the highest drop we have seen.
As always, the financial news outlets went crazy with the same rhetoric used in January 2016, August 2013, May 2011 and the infamous “flash crash” of 2010. “If it bleeds, it leads” is the mantra of these so-called experts, not facts and calm. Despite all the noise from the talking heads on CNBC and Bloomberg, markets stabilised and are moving upwards again.
The bottom line is we’ve been here before, and we’ll be here again. Nothing that has happened this year affects the long-term objectives of any investor.
No news is good news
Before this “crash” there was very little bad news regarding the world economy or geopolitical events that would typically spark such panic. There is uncertainty in the world, as there always is, but generally speaking the fundamentals of the wider economy provide us with optimism:
- Positive economic growth rates are returning on the back of growth in Asia and improved outlooks in Europe and the US.
- Corporate earnings are excellent – in the US they are at a 17-year high.
- Price-to-earnings ratios are hovering around historical averages and do not indicate overinflated value.
As with many of the market corrections in recent history, this sell-off seems to show us the new paradigm of how modern markets operate. The volatility that we saw in stocks like Boeing highlight the problems of automated trading and algorithms.
The explosion of passive investments with automated trading strategies and highly leveraged Exchange-Traded Fund (ETFs), used largely by hedge funds, has resulted in a “selling vortex”. What might have been small market adjustments in yesteryear have become wild self-propagating swings as buys and sells are triggered automatically by “the machines” and subsequently amplified by human copycats.
One positive of this change is that it highlights how important a high-quality active fund manager can be to buck the trend and protect investors from this robotic frenzy. Markets around the world fell around 10% over this period, while the many managers reduced this fall to 5% or less. Their ability to preserve capital is a fundamental reason why we people place trust in them.
Keep calm and carry on… and ‘avoid the noise’
For many expats planning their financial future can be as long away as 10, 20 or even 30 years’ time. The “great sell-off of 2018” may continue, or it may be over, in either case, it will be forgotten as quickly as it occurred.
As always, what we saw during this drop was an opportunity. Those clients who have listened to me in the past had money to allocate while markets were down and will benefit in the future. Even with the recovery over the next few days, markets remain 5-10% below their recent record highs. We have not seen such a significant discount for two years, take advantage of it.
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