Even those with only a passing interest can’t have failed to notice the behaviour of markets over the last few weeks and months. While the Trump/Russia soap opera continues to play out, North Korea continues to fire sea-bound rockets and terrorists continue to target innocents, stock markets here and across the pond continue to hit record highs.
The problem with any sustained rise however, is that optimism often transforms into complacency which in turn gives rise to greater risk-taking. So, should clued-up Foolish readers now prepare themselves for the worst? Here’s my take.
Here comes the pain
Let’s get this out of the way: at some point, something will happen to bring the markets down. That’s not to say it will happen tomorrow, next week or next month. Calling that with any degree of precision requires the sort of crystal ball that’s naggingly always out of stock.
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Suggesting that a market must fall at a particular time is akin to suggesting that a flipped coin must result in heads if five previous flips resulted in tails. What we often forget is that each flip is a separate event, the result of one having absolutely no influence on the next. It’s called the gambling fallacy and it’s why investment products always come with the warning that past performance is no guide to the future.
Applying this to the markets, continually ‘flipping tails’ could quite reasonably see the FTSE 100 reach 8,000 later this year, based on exuberance, positive economic data, political reassurances or a combination of all three. Even if markets did then fall, they might only drop back to where they currently stand.
As investors, it’s not necessary to know what will happen but only what could. And, given that stock market corrections and crashes happen far more often than we think, it’s worth spending a few minutes contemplating how we might respond.
What to do?
Perhaps the main thing to understand is that there isn’t a one-size-fits-all solution to this. We all vary in terms of why we’re investing, in what and for how long. As such, your thoughts on recent market highs should depend on the thing you actually have control over: your attitude to risk.
Those who are already retired and sitting on substantial profits may want to reduce their exposure to equities somewhat. That’s rational and what most financial advisers would suggest.
Moving into cash with the intention of returning once the markets have settled is more problematic, however. We’re notoriously rubbish at judging when the latter has occurred. We could even miss the boat entirely and end up paying more to get back what we used to own (not to mention facing a substantial bill in commission fees).
Truly long-term investors — those who have no need or inclination to cash-in their holdings for many years — can afford to ignore any volatility that comes their way (and perhaps take advantage if funds allow). So long as they hold strong, quality companies with solid balance sheets, any drops in the value of their portfolios should be welcomed with a shrug of the shoulders and the knowledge that it’s far better to judge investing prowess over decades rather than a few months.
What might happen to markets in the rest of 2017? Who cares?
