So capital markets have been sailing along pretty smoothly for a while now. Not a lot of volatility, just a steady upward trend. In the investing world, that’s about as good as it gets.
But I noticed the other day the winds shifted from the East to the South, so that’s probably as good an indication as any that markets are about to turn too.
Of course I have no idea if markets are about to turn, and neither does anyone else, for that matter. However, perhaps it’s time to remind ourselves about a few simple truths that, while markets are smooth and heading up, we all agree upon. However, when markets become volatile and short term outlooks become bleak we tend to forget.
We forget because the entire financial industry is screaming at us to do something. We forget because we rarely hear any common sense investing advice. And we forget because economic downturns are painful. It’s painful watching our portfolio values decline for days, weeks, months, even years. It’s painful because downturns are also the most likely time we may have to endure other financial hardships such as job loss or the inability to sell our home. In the absence of a reasonable strategy, panic starts to sound like a good plan.
So just as a handy reminder, we give you our nine points of wisdom. Post them on your refrigerator or someplace you’ll look when markets start doing what you don’t want them to do.
Northstar’s Nine Points of Wisdom On Capital Markets
- Markets will decline from time to time and such declines are to be expected;
- What will trigger a decline will be almost impossible to predict;
- It is virtually impossible to predict when the markets will fall or when they will recover;
- They will recover;
- The media will make it sound worse than it really is;
- Many self-proclaimed pundits will insist, “It’s different this time and the old rules will no longer apply.” (They have been saying this for decades and have been wrong every time);
- Many of those pundits will claim expertise because they correctly predicted the last crash or boom;
- While the cause may be different, the results have always been the same – the “old rules” do apply and the market will recover; and
- Following a disciplined and diversified investment plan is a good strategy to get rewarding results over the long run.
A little more on Point of Wisdom #7: Each significant market event produces a new crop of market pundits. That’s the reporter who said it was going to happen before it happened, or the fund manager who reaped huge profits by betting on it. The important thing to remember is those pundits will have no more success at predicting the next market event as the rest of the industry insiders who missed it.
The reason is simple: Every so-called expert in the industry who is making predictions is figuratively throwing darts blindfolded. Some of them will hit the bullseye. Most will miss wildly. But blind dart throwing is not a skill game. All you can say about the guy who hits the bullseye is that he got lucky, not that he has a special skill that allows him to see what others can’t (i.e., the target).
And the important conclusion for the investor is this: If you bet on the guy who hit the bullseye in Round 1, don’t be surprised if he doesn’t come close in Round 2.