Crisis Fatigue

December 2, 2010 by  
Filed under Uncategorized

When discussing long term investing, I typically go over a list of all of the Bear Markets we have had since World War II, as well as a (fortunately, much shortened) list of some of the crises we have had over the last 50 years. Some were merely figments of the collective markets’ imagination,  some were quite temporary in nature and, yes, there were other crises which were very real and very devastating. But, we survived them all.

The point of this exercise is that, in spite of all of the calamities – wars, inflation, oil embargoes, assassinations, terrorism – the best way to participate in the long term growth of the economy was (and still is) to partner with some of the greatest and strongest corporations in the United States and, indeed, the world, through ownership of shares of stock. Being discouraged, being afraid or even overly cautious was a very bad strategy then, and is a very bad strategy now.

Witness: In January 1973, at the very top of a Bull Market, the Standard and Poor’s 500 Index was 120. From there it declined 45% over the next two years. Pretty terrible, right?

Well, in revisiting Thanksgivings past, here is where that index stood: In 1980 at 140, in 1990 at 315, and now, in 2010, it is close to 1,200. Including dividend income, the rate of return from January 1980 to the present has been approximately 11 per cent.

Yet, in the last two years, the world has seen so many crises that it is difficult to keep track of them – home foreclosures, bank failures, insurance companies in danger of default, the automobile industry in distress, even sovereign nations unable to pay their bills.

Pop quiz! What was the crisis everyone was hyperventilating about early this year? Hint: It was a debt crisis of a country that had had a tremendous building boom. (See the answer at the bottom of this post.)

And the crises keep coming. A while back, I had dinner with a high school friend who asked me if he should be worried about “the Greek Crisis.” I said that he could worry if he wanted to, but that not much was going to change. Now, of course, this year we have had to pay attention to Ireland and possibly Spain and perhaps other places that are nice to visit, but no longer so nice to live or work in.

Am I recommending that you ignore the next crisis? Actually, yes.

Get a Plan

If you already have a plan, you should stick to it, regardless of the Crisis du Jour. If you don’t have a plan, you should get one. Determine your risk tolerance and time horizon, establish an Investment Policy Statement and construct a well diversified portfolio of stocks and bonds.

You could attempt to do this yourself, but you probably should do it with the help of a financial planner who works for you (and not his or her employer).

And then, having carefully designed and implemented a plan that is right for you, do not be influenced by the media coverage of some terrible event which could possibly derail western civilization, as we know it. As before, we will survive it, whatever “it” is.

Stay the course. Stay the course. Stay the course.

For more posts on this subject go to The Education of an Investor.

Answer to the pop quiz: Dubai. Who even remembers that?

For a humorous take on the Dubai hubris, read Dubai Debt Crisis Halts Building of World’s Largest Indoor Mountain Range.