surinenglish

the bigger picture

When alarm bells sound it's probably too late

As I write, today Wednesday 6 March, is the 10th anniversary of the financial crash that saw stock markets around the world tumble. The S&P 500, the index of the top 500 publicly traded companies by capitalisation in the USA, plummeted to $666, giving back 57% of its value. This was the bottom of a 17-month 'bear market' from 2007 to 2009.

This is an anniversary, sadly, which many would doubtless wish to forget. Millions of investors would have sold in panic as they were bombarded hourly in rolling 24-hour television news cycles with more alarming news of fresh declines in stock prices.

Millions of people, fearing they were going to lose all their hard-earned capital, never to be recovered, sold into losses in an effort to save some capital. Some tried to hang on hoping against hope that the "nightmare" would end, only to capitulate when the fearful pain of total loss became excruciating. For many this experience was life-changing.

The market did not fall all at once but gave a brief moment of hope. The worst of the rout began early February and by mid month had stabilised, only to fall again by 25% in just 18 trading days, hitting the bottom on 6 March.

In today's world, with so much connectivity and media information, it takes a great amount of belief and self-discipline to isolate oneself from the noise.

Avoiding greed when prices are skyrocketing, as witnessed with Bitcoin and Crypto currencies in 2017, and fear when equity prices plummet, as in October 2009, is easier said than done. However this is the key to successful investing over the long term.

Today the same S&P Index has more than quadrupled from hitting a bottom in 2009. By mid May the S&P had increased by 30% and by the end of the year it had gained 60%. Investors who could "stay the course" and held their nerve, were rewarded. $10,000 invested at the bottom in 2009 was worth $42,638 in October 2018.

What took place in 2009 is a timeless lesson for investors to be diligent and honest with themselves before making an investment in the stock market, which should always be for the long term. Investing is not speculating.

A portfolio of marketable securities readily priced and publicly traded provides a return on capital and liquidity which complements other investments, such as real estate, venture capital, private equity and collectables. Investment success is predicted on keeping capital allocated to a given investment strategy intact.

However to be rewarded investors must be able to stay the course and "keep their heads when all around them are losing theirs". Since 2009 the market has rewarded investors but this will not continue indefinitely.

Now is the time to examine your investment time preference and your allocation of capital to riskless savings and risk assets - not when alarm bells begin to echo those chilling words "too late".

The author is a member of the Society of Trustees and Estate Practitioners. jb@ehh.gi

The comments and observations by the author are a reflection of his opinion and do not constitute an offer to buy and hold securities, nor does he receive any remuneration of any kind from names referred to.