On Monday February 26 most of the world’s stock markets
were riding high. The next day the Shanghai market fell around
8% and most major markets fell around 3%. Volatility continued
during the following days. Why did the markets fall? The trigger
was action by the Chinese government to curb the runaway stock
market. Although the measures they planned to take were quickly
withdrawn the damage had been done. But other factors came
into play. Alan Greenspan, the former head of the US Federal
Reserve Board commented there was a possibility of the US
going into recession by the end of the year. Coupled with
a slowing down in the residential property market and 10,000
announced layoffs at Airbus in Europe this was sufficient
to depress most global markets. The Indonesian stock market
was no exception.I would add that there is still plenty of
good news around but the mood of investors was decidedly gloomy
on the 27th and ensuing days.
What was the impact on individuals?
A large percentage of people in the West have investments
in the stock markets, either directly through share ownership
or indirectly via savings and pension plans, portfolios and
insurance policies. For almost four years they will have seen
a steady rise in the value of their holdings, perhaps 50%
or more over the period. Now once again they are seeing the
downside. For investors who have recently gone into the markets
(many are drawn in at the late stage of a ‘bull’
or rising market) the fall will come as a great disappointment,
especially if it continues. Some will panic and cash in and
will be forever convinced that the stock markets are a casino
and to be avoided at all costs. They will take their money
and place it for ever in a deposit account where the real
value will reduce over time or put it into something far more
risky where all could be lost.
But what do experienced investors think?
Experienced investors will not even bat an eyelid when markets
fall. The shrewd ones will even take advantage of the fall
to increase their holdings. They never take money out of the
markets when they go down because they do not need to. They
have structured their financial planning to ensure they have
ample cash reserves to draw on in the short term. They might
take profits from time to time and use market highs to reduce
their holdings but they know that money they place in the
stock markets is there for the long term and that history
is on their side. Shares are not a lottery; they represent
real companies in the real world. If you own your own business
in Bali, for example, then you own 100% of the shares of the
company. Owning shares in BP, Singapore Airlines or Microsoft
is the same in principle, except that there are thousands
of other shareholders. One big difference is that the big
companies are strictly regulated, highly efficient, financially
strong and pay a share of the profits in the form of regular
dividends. Hence they have no difficulty in attracting long
term investors.
So should the falling markets worry you?
In reality they probably do, certainly judging from anxious
e-mails I receive from clients when there is a sharp fall.
But to answer the question, in practice the falling markets
should not worry you, since if you have been following sound
financial advice you will have adequate cash and a diverse
portfolio consisting of several asset classes of which equities
(shares) are just one and it is in any event the asset class
that offers the best growth potential over the long term.
So stop worrying!
Colin Bloodworth is a senior financial adviser with Financial
Partners International. The views expressed are his own. If
you have any questions you may contact him at 021 520 8099
or colin.bloodworth@financial-partners.biz
