Saturday, January 9, 2016

"Deja Vu" All Over Again

"Deja Vu" All Over Again
Bert Whitehead, M.B.A., J.D. ©2016

2016 will be a year which separates the gamblers from the investors.  Of course, we all want to think we are knowledgeable, prudent investors.  In fact, people who are most worried about the current financial upheaval are closet gamblers.

The Dow Jones Industrial Average has tumbled more than 1,000 points since the beginning of 2016, which was a much better performance than the Chinese stock market that stopped trading most of the first week of the year.  This panic impacted virtually all global stock markets, and aggravated the nosedive in commodity prices.  Gamblers anguish that this is just the start of the collapse of the world economy, which some economists predict will drop 80% in 2016.  The world seems unsafe from ISIS's distressful terror attacks in Europe, to North Korea's claim to have set off a hydrogen bomb, compounded by the emerging conflict between Saudi Arabia and Iran, and the misery inflicted in Syria by both Russian and U.S. bombers.

By comparison, the U.S. economy seems strong:  unemployment has dropped (although fewer workers are in the workplace). Most economists expect our Gross Domestic Product (GDP) to grow more than the GDP of the majority of western nations.  While some whine about the 'growing inequality' in this country, that is a rather parochial view because world-wide the middle class is the largest in history.  We no longer are concerned about the starving millions in China and India as their prosperous middle class has grown in proportion to our decline as a profitable manufacturing nation.  The global economy is so intertwined that economic issues in any of the larger world economies impact other countries.

The Past Does Not Predict the Future

Just as the proverbial broken clock is right twice a day, so the price of any stock or of the stock market as a whole measures only the value at a single point in time.  Market volatility is the method the market uses to find the right balance in pricing stocks over a market cycle.  Generally market cycles are extremely variable, lasting from 3 to 15 years.  Thus, past performance is not a reliable predictor of future value.

The reaction of gamblers is to try to determine which factor in the global economy is decisive.  These market timers foolishly believe that they can figure out future value from past market trends, just as gamblers bet on roulette using past patterns as their guide.

Sharp drops in stock prices are the time when investors who dollar cost average make the most profit in the long run, which is ideal for working people in the accumulation phase.  The biggest mistake investors make is to panic during a downturn and sell out.  Avoiding this outcome requires the investor to make two decisions right:  when to sell and when to buy back in.

Reduce Volatility for Peace of Mind

The reason our compliant clients prosper is because they have U.S. Treasury bond ladders.  These securities reduce the volatility of the whole portfolio, and are psychological assurance that they won't get wiped out.  Of course if we have a worldwide financial collapse and we all have to learn Arabic, our wealth could be at risk.  But in the end, our clients will still have more money than their neighbors.
For those of you who weathered the 2008 market crash, the current situation may be deja vu.  In 2008 I wrote 16 blogs which are on point in evaluating the present situation.  If you were not able to read them before, or perhaps don't remember them, you can review them at

Thanks to Shari Cohen for copy-editing.