What is the stock market telling us? Watch Out!
The dramatic stock market collapse of the past fortnight - all gains in the past year have been pretty much wiped out - along with the very poor economic news coming in from the United States in particular but Europe too, and developing markets like China and India where growth is slowing and inflation is rising, means that there are no easy ways to protect any wealth you might have, let alone make any more.
Savings need to be protected. Investments need to be reviewed with a focus on defensive assets. Retirement income expectations need to be completely reconsidered if you do not already have a fund that hasn't been losing money.
Stock markets may be a very public manifestation of the general state of the global economy but their erratic movement is also a reflection of the volume of trades (thin or heavy), short term fear or optimism (that can change within minutes, let alone days) and greed.
A huge fall in stock market prices doesn't mean that every company whose price drops is suddenly losing money or not worth owning. Nor is it a 'contrarian' signal to buy.
Daily stock market activity is about the most irrational thing you could use to gauge whether a share is worth buying or keeping, (no matter how cheap bank stocks have become.) In the case of financial companies, their prices have collapsed for a very simple reason - too many of them are bankrupt but are being propped up with taxpayer's money.
What falling stock markets are telling investors is that there's never a good or bad time to buy really top quality companies or assets at the cheapest price you can achieve. There is seldom much profit in buying shares that are already deemed 'expensive'. A stock market share is just an investment from which you hope to make money, ideally in times like this, in the form of annual dividends. It is not a fine painting that you admire but only intend to hang on your wall.
Identifying good, cheap individual shares is not easy for professionals or even for the greatest investors like the famous Warren Buffett. Even though they try to value shares full-time, day in, day out, even they sometimes call the market wrong, especially when the markets are increasingly manipulated by politicians and their creatures in the central banks.
For most of us, inexperienced in individual stock picking, we opt instead for pooled investment funds and lower cost stock market index funds or ETFs, pools of funds that trade as a single stock on a stock market.
Can such funds produce good outcomes, even in these hugely erratic, volatile times?
Most financial advisors I deal with say they can, "if you know which ones to pick" but because of the times we live in, many now recommend a diversified range of these funds, always watching costs and charges like a hawk. They also suggest that you review your holdings - no more 'buy and hold forever' - and be prepared to take advantage of the free switches between funds that the life companies and investment companies offer.
As this great crisis continues - with more bad, than good news seemingly coming our way - they are also agreeing more than ever that:
- the economic direction of the markets and investment world is shifting from west to east;
- that the US dollar is unlikely to remain the single, reserve currency of the world; gold, meanwhile is recognised again as a store of monetary value;
- that the currency war that has broken out - no indebted country wants to be stuck with the 'strongest' currency since this affects export growth which they must count as domestic spending weakens;
- that commodity prices may fall in the short term but demand in developing countries means oil, food, water is only going to get more expensive.
Maybe this is a good time for people with deep pockets, nerves of steel and a very clear understanding of the markets and geopolitical risk to make a killing on the markets.
If you have the nerve but not the knowledge you could do worse than to have a proper wealth-review of your existing finances done by a good, fee based advisor, or take an introductory or follow-up investing course, offered by the likes of InvestRcentre.com - I found the one I did very useful. (The next course is in Dublin on 17 September.)
A register of 67 newly qualified Certified Planning Graduates is now available from the Financial Planning Standards Board at www.fpsb.ie. Not all the graduates are independent advisors - some may work for life assurance companies, banks, etc. Nor do they all necessarily charge fees (rather than take commission.) Be sure to ask.
Meanwhile, secure your spending - consider shifting some of the 'paper' money you have into 'real' gold money. Start a healthcare contingency fund (in addition to your main 'emergency' cash fund) and keep reducing your debt if you can.
Avoid taking on any new debt…well you knew that already. Too bad it's such a difficult concept for politicians and central bankers to understand.
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