The world stock markets have taken a punch in the past several days, down roughly 5 percent from a week ago.
Reading the financial press and watching CNBC, you’d think this is the end of the world.
It could be; but it probably is not.
Stocks go up. And they go down. And then they go up again (about two out of every three years). This has been a pattern since stocks were first publicly and commonly traded about 200 years ago.
The past six years have been very unusual. Since the big downturn of 2008, the markets have seen a relatively calm upward climb.... Had you invested $100 in the world stock market on March 1, 2009, and had you stayed invested until about a month ago, your investment would’ve been worth about $270.
In the past several days, following what Bloomberg and the Wall Street Journal are calling a “global selloff” (accompanied by pictures of traders holding hands to their faces, looking aghast, as if loved ones are falling off a cliff) your 2009 $100 investment would now be worth “only” $256.
What’s going to happen next? Here is what: Some investors (prey to the frantic newscasters) will panic and sell their stocks, only to reinvest when prices go back up. This strategy is called selling low and buying high. It doesn’t work well, even ignoring trading costs and unnecessary tax hits.
Others, a minority of small investors, will not sell. In fact, if prices dip more, and they rebalance their portfolios, they’ll see that it is time to buy more stock. This strategy is called buying low and selling high. It works. Historically, it has worked very, very well.
On a similar note, the relatively calm climb upward in the value of world stocks has been due largely to the super performance of U.S. stocks....Foreign stocks have lagged. That’s especially true of European stocks, troubled by the severe financial problems of Greece. And it is true of emerging-market nations’ stocks, hurt by the recent tumble in commodity prices (gold, silver, oil...). For U.S. investors, currency flux in favor of the dollar has accentuated the lag in foreign-market performance.
But just as you shouldn’t assume that because stocks have fallen in the past few days they are a bad investment, you shouldn’t conclude that the outperformance of U.S. stocks is going to continue forever. It won’t. At some point, foreign stocks will outperform US stocks....That flip-flop between U.S. and foreign outperformance is another ongoing pattern that will likely continue forever... If currency flux (which is as unpredictable as the stock market) works in the opposite direction as of late, and the dollar starts to drop vis-à-vis the Euro and Pound, US investors will see the foreign-stock side of their portfolios significantly outpace the domestic side.
In conclusion, stay focused on the long term, keep your portfolio balanced (I can help if you need help there), and breathe deeply on days like this one.