2016 has started roughly for stocks all around the world. The chaos in China spread quickly to other continents and demonstrated brutally how interconnected the global markets are today. Oil is crashing to new lows and is currently trading close to $30. The S&P500 index had its worst-ever first week and went down roughly 10% from autumn highs. The noise is getting louder and louder and stock market investors are faced with a dilemma: should I sell everything or just sit on my hands and keep it cool.
It's not easy to sit on your hands when markets are in turmoil.
It’s not a big surprise that the noise gets louder in turbulent times. In fact, volatility is a good friend of media companies. Dramatic headlines get more clicks online and business channels attract more viewers when all charts are pointing down and the markets are a sea of red. The talking heads are doing their best to stir everything up: one is shouting BUY and the other is crying SELL.
Banks, money managers, and financial advisors also activate themselves in volatile times. They smell blood and start telegraphing advice in every direction. Some are even trying to create panic, it seems like. Or how else would you interpret the "Cataclysmic Year – Sell Everything" warning from RBS?
The behaviour of financial institutions is understandable considering that they need to generate client fees. In the current interest rate and legislative environment, client fees are by far their best revenue source. It doesn’t even require the use of balance sheets. It’s also good to remember that financial institutions are primarily for the benefit of their shareholders, not their clients. If you disagree, please have a reality check, e.g. by reading the public resignation letter "Why I Am Leaving Goldman Sachs” published in the New York Times.
Psychologically it’s very hard to just sit on your hands when you’re constantly bombarded with warnings, dramatic news headlines, and a multitude of conflicting advice. However, often it’s exactly the right thing to do. It’s been shown over and over again that timing the market is extremely difficult. Not even professional portfolio managers with years of work experience and education can pull it off. That’s why actively managed funds almost never beat passive index strategies in the long term.
The point is that even though you’d now succeed in timing the market (e.g. only take a -10% hit if the market tanks let’s say -20%), there’s no guarantee that you’d be able pick the bottom and make a proper re-entry. There are many who flipped to cash in the panic of autumn 2011 but who never re-entered the market and thus missed all the fun of 2012-2014.
If you’re in the stock market for the long term, for example saving for your retirement days, you’ve got to let time do it’s job. The stock markets will go up and down, but in the end of a 20+ year period it’s more likely to be up than down. Instead of trying to perfectly time the market, just continue with your investment plan and regularly buy a bit more of your index fund, or whatever your low-cost well-diversified investment vehicle is. Mentally this is difficult, but on average you’ll make better market entries and you’ll experience a lot less stress.