GUEST ARTICLE: Listen to the financial pundits or BBQ banter and you would be forgiven for thinking we were caught mid-chapter of Chicken Little.
Doomsayers are publicising their scary visions for the global economic future and lay people are confused and made fearful by the Nostradamus-like vague prophecies of complete financial meltdown.
What is most bemusing is the strength of resolve for those who “predicted” (and don’t they all) the demise of the markets.
Say it will rain often enough and one day you be will right – this makes you no more a weather man than a statistical advocate as every day it doesn’t rain brings you statistically closer to the day it does. These commentators now appear as all-knowing gurus and while exposing the problem – have not provided a solution.
This ambiguity has enhanced the true disease of finance, Fear. The more we compound the fear the faster we compound decay.
Getting caught in the hype surrounding the “Crisis” or “Melt down” (or whatever sensationalist garbage anyone wants to label this economic period) has been a catalyst and our markets are short term mirrors of this sentiment with daily movements like these:
|Day||Market Consensus & Movement|
|Monday||World going to end, markets -7%|
|Tuesday||Miracle cure found, markets +5%|
|Wednesday||May be wrong about cure, markets -3%|
|Thursday||Right about cure, wrong about problem, Markets +2.5%|
Something is missing from all of this sentiment … Logic.
Long term, our market is based on principles of Capitalism.
The purpose of business/capitalism is to generate profit and true investment is not about the gamble of outperforming asset classes in the short term (as expressed by the financially misguided investors/advisers who chase short term glory) but in acquiring more assets in volatile times.
Witnessing a 20 or 30% fall in the value of your investment is not easy but focusing on the ownership of more assets is the true and correct fundamental of wealth creation.
The maxim prior history is no indicator of future performance is true with one exception – as long as the fundamentals of capitalism exist, the market will come back to its previous high point and beyond. A broad index recovers lost value and beyond over time
Compounding wealth creation occurs when more of these assets are acquired as they become cheaper in value such as at present in November 2008 when the ASX has dropped 50%. This is a mathematical science with no speculation in sight.
You only need to look at the journey of the market since the “Crisis” or “Melt Downs” in ’87, ’91, Tech Wreck, 911 to now to know that the sky doesn’t fall and a logical approach that ignores fear is the best way to challenge the prophecies of the Doomsayers.
“If you can keep your head while all about you are losing theirs, yours is the world and everything in it.” Rudyard Kipling, If
This guest article was written by James Mousa, a Financial Planner with BDO Kendalls Financial Planning in Cairns, Queensland.
Through his workshops James talks candidly about investment risks and costs, using his understanding of investor psychology and market forces as well as the factors that motivate investment decisions to advise clients on how to invest prudently with a long-term perspective.
If you’re a blogger or an expert about a topic I cover on this blog I encourage you to contact me and I’ll consider publishing your guest article here including generous attribution and back links back to your website as thanks for your contribution