“Carnage on global sharemarkets”!

Sounds like an awful scenario, doesn’t it? What sort of outcome do you think would lead to headlines such as this? A fall of 30%? 20%? Whatever it is, the result must be pretty bad for the word ‘carnage’ to appear. Or so you would think…

Let’s put aside the sensationalist headlines for a moment, and look at the facts.

Carnage! but is it…?

What exactly has happened on global sharemarkets as of the time of this headline? For the sake of the exercise, we’ll just have a look at 5 major sharemarkets:

1. Euro Stoxx 50 Index (SX5E:IND)
2. United Kingdom’s FTSE Index (UKX:IND)
3. Germany’s DAX Index (DAX:IND)
4. USA’s S&P 500 Index (SPX:IND)
5. Australia’s S&P/ASX 200 Index (AS51:IND)

These could be considered reasonably indicative of “global sharemarkets”, so what has happened this last month?

While the outcomes don’t look all that fantastic, they aren’t too far away from what would be expected from the list of short term possibilities in a global share portfolio. If you weren’t ready for that level of volatility then basic financial planning would suggest that your money perhaps should not be in this area. Alternatively, basic financial planning would suggest that if your money IS in this area then it should be balanced with other areas that are likely to be ‘up’ when these markets are ‘down’ such that the overall impact of your account value remains within your comfort level.

In reality, a one month measure of return is more akin to speculation than investment, so what if we consider longer time frames. How about 1 year?

So the result over one year doesn’t look to be outside the realms of ‘expected’ levels of volatility for a global share portfolio. One year could still be regarded as speculative, as anyone expecting to invest in global shares for only 12 months without the possibility of a negative return is definitely taking a speculative risk. How about 5 years? That’s arguably still not long enough for a global share based investment but what does the recent ‘carnage’ in markets look like if we take a 5 year perspective?

The ‘carnage’ doesn’t appear to have wreaked enough damage for the word to be appropriate when we look at a 5 year perspective. So what can we learn from this?

Sensationalist Headlines

If there is a lesson to be learned from this example, it is to be wary of sensationalist headlines. While they may indicate the immediate emotive reaction to an event, they are unlikely to be of much use for a prudent person seeking to keep track of their investments. They are certainly of no use for portfolio decisions. While these suggestions may appear obvious when put forward in a single note, it is easy for logic and careful consideration to be put aside when emotion comes into play. While we cannot necessarily keep our emotions under control all of the time (after all, wouldn’t that take away the exact part of us that makes us human?), we can at least allow ourselves time to digest any new data or news before taking any steps to alter our longer term plans.

What if sensationalist headlines are correct?!

Sometimes sensationalist headlines actually ARE indicative of how a person should react. I can think of the 2007-2009 decline in markets during the Global Financial Crisis as an example where this was the case.

During that period, global sharemarkets fell and fell again – with each lift followed by another fall. By the time most markets hit their low point (usually February or March of 2009), there were many people who regretted not selling at the first sign of worry or turmoil. Even though markets had plummeted by historically larger-than-average amounts, there were still commentators in February/March suggesting the world was headed for worse outcomes, and many of those commentators were suggesting to sell at that point. By this time investors who had adopted a ‘long term outlook’ were beginning to feel a little silly, and it would have been easy to give in to the surrounding worry and sell investments to move to cash. Had a person done so, they would most likely have been out of the markets during their best recovery periods.

My point here is that the headlines will always have a tendency to reflect immediate outlooks – which tend to be driven by fear, optimism or pure guesswork – and basic financial planning tells us that this is not a prudent basis on which to make long term investment decisions.

Headlines can be helpful for traders, who seek to buy and sell on short term market or security movements but they are not of much use for genuine long term investors.

Sensational Media has its part in the world…

For all the difficulties sensational media provides for those seeking to make prudent and balanced decisions, there are a host of reasons why sensationalist media exists and why we remain fascinated by it. There’s a great article to be found here from the Catherine Gross of the Examiner.com website, which ponders sensationalism and its role. The headline image in this post is from the picture associated with Catherine’s post, and it makes a great parody of the sensationalist headline concept.

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Disclaimers, Notes & Further Reading

• Please remember the Great Disclaimer – This post is simply a reflection of my thoughts and musings. It is not a recommendation to buy/sell/hold a particular investment nor should you interpret it as a offering a strategy that may be appropriate to you. My thoughts and musings should be considered ‘general advice’ only and in reality they should not be considered to be any sort of advice at all. You certainly could not use it as the basis for working out a strategy of any coherent type, so please do not attempt to do so. I’ll place the technically correct disclaimer later in these notes so that the obvious is even more obvious – which tends to make regulators and compliance checkers extremely happy!
• The charts i have used above have been drawn from the Bloomberg.com website, under the “markets” menu. It’s a great little tool that lets you quickly and easily compare various global share markets through charts. There are also tools for checking other markets such as currency and debt – so if you’re wanting quick facts or just have some time to kill then you may find this site very useful.
• This post deals with sharemarkets – simply because that is where the headlines for media tend to find the most sensationalist possibilities. Other markets are bigger – for example currency, property or debt markets but it is in sharemarkets that large short-term price movements are more obvious so that tends to be what is highlighted day-to-day.
• From a financial planner’s point of view, sharemarkets are only part of the bigger picture of investing for the long term. Financial planners tend to look at overall positions, and that would often include cash, fixed income, property, homes, cashflows, taxes, rules and regulations, lifestyle expenses and personal attitudes. It is only after pondering this complex mix of priorities that planners would come up with a recommendation on investments, so please keep in mind that this post deals with an extremely small part of the overall picture.
• Formal Disclaimer :
• Michael O’Hara (that’s me) is an Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125), AFSL 238429. This post does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out.
• The actual article that provided me with this sensationalist headline can be found here. However, i do not wish to highlight a particular article or writer or media outlet as each person/institution has their part to play in providing you with information, data, news and entertainment – and it’s not my job or position to say that any one is better or worse than another. Rather, i’m making comment on the ‘tone’ of commentary and highlighting that investors seeking long term outcomes should try very hard to make decisions based on more personally applicable data and information, along with prudent professional advice.