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Markets Disregard Global Unrest

September 26, 2014

Take one second to think about all the unrest that is taking place around the world. The Israelis and Palestinians reached a peace agreement, however this peace typically doesn't last. The Ukraine and the Russian backed opposition are still at odds. ISIS has sprung up out of the Syrian civil war conflict, and now the U.S. has just announced it's commencing airstrikes in Syria and Iraq to fight the extremist organization. Despite all of this geopolitical unrest, the Ebola outbreak, and Scotland almost voting for independence, most U.S. markets have reached and hovered near all time highs. One would think these factors would weigh heavier on the market, but this just proves the fact that the markets already have all the knowable and unknowable information packed into the price. This makes it especially easy for the prudent investor like you.

However, we're sure you've heard the pundits and talking heads giving their market timing predictions and if you haven't, it's only a matter of time. When you do, just think, even if the crystal ball readers actually knew what the future held, why would they tell everyone? If it were true, they could make way more money for themselves. The good thing is that we don't need to know where the market will move tomorrow or what global event will affect it positively or negatively the following day. Instead, we should focus on the long-term positive trend of the markets. The daily ups and downs are miniscule when compared to the overall market growth over a life time of investing. This is why our best course of action is to take this opportunity to rebalance our portfolios, if they are not already properly diversified. The last thing you want to do is panic because some guru made a negative prediction. The worst thing we could do is make unnecessary trades that incur more taxes and fees to position ourselves for the next market move by pulling money out of the market.

In fact, we would do just the opposite because there are essentially two outcomes of this assumed market limbo and global uncertainty. Either the markets will rise and we will be fine, or the markets could take a significant drop and we will still be fine. All we have to do is follow the simplest rule of investing, buy low and sell high through rebalancing. So if the latter does happen, we should take that opportunity to buy the market when it's low, instead of pulling out and selling when it's low. The market will eventually rebound, as it always has, and when it does, you'll have a greater portion of the market at a cheaper price.

This is a much easier and more effective alternative to perfectly timing the market by falsely deducing that world events effect all markets the same way. The catch with market timing is you have to sell your investments at the highest point before the market drops and then reinvest before the market swings back up from its lowest point. To do this you actually have to time the market successfully not just once, but twice! The odds of doing this correctly are about the same as winning the jackpot. If this is done perfectly, just don't forget to include transaction costs, taxes, and other fees, and you will actually have less than before had you stayed in the first place. Not only does this approach destroy your wealth, it destroys your investing peace of mind.

So instead of market timing this fall because some person on TV said they knew the future or predicted a new world war would crash global markets... Change the channel and live your life knowing your investment strategy is backed by Nobel Laureates and proven academics, instead of soothsayers with crystal balls and tarot cards. Remember that these global problems and conflicts will not cease over night, that they are likely to occur again in the future, and whether it's a bullish or a bearish wave ahead in the markets, you just have to ride it out.

 

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