This Time Isn't Different
Here we go again. The current situation that the average investor is worried about is essentially no different than previous occurrences of uncertainty in the markets. It's only the names and places that are different.
In addition to the eventual Fed interest rate hike, there is still economic weakness in the emerging world, along with persistent low growth across Europe and Japan. This has made it hard for markets to ignore the impact on earnings and the probability of a global slowdown. Now China's economic growth is slowing down as the country transitions from an economy based off investment, to a consumption based economy like the United States. This slowdown is also affecting the economies of China's neighbors and it is making investors skittish around the world. However, this should be expected. Overall market uncertainty isn't desired by an investor who chases returns, which is why we are seeing so many people head for the exits.
As a result, the markets are officially in correction territory after they started falling since mid-July. As we've said before, this should be expected. The market goes up and the market goes down - even as this information is being communicated to you, our US market Dow futures surged 600 point up, after yesterday's drop.
No one knows where it will go today, next week, or next month. However, historically, we've seen that the long term trend is up. No matter how much fuel the media dumps on this latest fire to induce panic and selling, as a long term and evidence based investor, you know that panic and fear doesn't cause losses. Selling to avoid pain in a down market does.
Rather than giving into fear because of a market devaluation and volatility, we need to embrace it, we need to use it to our advantage. Volatility gives us the chance to rebalance our portfolios and buy equities when they are cheaper. This allows us to follow the simplest rule of investing: "buy low and sell high". Another benefit of your investment philosophy is diversification and refusing to chase the hottest asset class. For example, China was the best performing market year to date and it has subsequently crashed. The S&P 500 was the best performing asset class last year that everyone sought after, but is now one of the lowest.
Instead of piling all of your assets into these cool and sexy markets, we've stayed the course, stayed globally diversified, and rebalance through-out to minimize the effects of a market correction in regard to your portfolio.
This time isn't different, only the names and places are.