It’s a fairly straightforward matter to justify the expectation that markets will recover, that the vast majority of companies will remain solvent and that the economy will pick up. There are plenty of historical precedents that share many parallels with today’s situation and provide us with invaluable lessons that give us cause for hope. As such, one can objectively and rationally state that there is no reason to panic. Indeed, the irony is that panic and fear act only to exacerbate our problems!
Throughout the ongoing downturn I have consistently argued that the turmoil on world markets should be viewed as a rare opportunity and that investors should hold firm and focus on the longer term. It is my firm view that we are reasonably close to the bottom of the market and that the global economic recession will last only 18 -24 months. The beauty of being an eternal bull is that you are invariably proved right – even if it takes longer than expected!
But I’m not going to reiterate these arguments. Instead I wanted to acknowledge the fact that although it’s easy to advocate the positive from an academic standpoint, it is quite another to remain resolute in the face of massive and ongoing losses. I know this better than anyone, having watched my long term portfolio drop by 30% over the past year. Although I could console myself with the fact that I have outperformed the wider market, it doesn’t alter the fact that my investments have experienced a sharp drop in value and that things could well get worse before they get better.
While I can’t make the fetid stench of our decaying portfolios smell any sweeter, I would like to put forward a few thoughts that will hopefully provide at least some encouragement to the disillusioned.
- We are much closer to the bottom than the top. Forecasts vary, but most agree that the market would be unlikely to lose more than another 15%.
- The moment you sell out you remove any downside risk. But you also lose exposure to any recovery. If you do not need the capital, it’s better to leave it where it is. If the prospect of further falls terrifies you, rather than sell out of your long term holdings, look to hedge your positions with derivative instruments – think of it like buying insurance for your portfolio.
- Do you think the market will have recovered in 5 years time? Who can say? But I guarantee that even if the high of 2007 hasn’t been surpassed by then, the market will most likely have come back a good way. Don’t be one of those that will look back at this period in history and regret that they missed the chance to load up on good quality stocks at bargain basement prices. Worse still, don’t be among those that will be kicking themselves for having sold out prior to the recovery. Consider the proverb – “A man is not old until his regrets take the place of his dreams”.
- The difference between a wise man and a fool is that the wise man will learn from his mistakes, whereas the fool is doomed to repeat the same mistakes over and over again. Sure, mistakes may have been made, you could like the rest of us be saying “would’ve, should’ve, could’ve” but rather than wallowing in self pity, we can choose to learn from our errors and grow.
I acknowledge that remaining resolute in these tough times is certainly easier said than done and that it takes a brave investor to buy when everyone else is selling, but this is precisely what a rational analysis of the situation would tell us to do. Fear is a powerful emotion and at times a useful one, but it should never be allowed to dominate our investment decisions. It will only lead to regret.
Make the markets work for you