The World Is Coming To An End ……Again.

There is no doubt that listening to and reading the various media commentary in the last 2 weeks regarding the Chinese economy and stock market one could be forgiven for thinking that the world is coming to an end and that personal wealth positions are being eliminated. The reason why this commentary strikes a chord with the general public is the apparent truth in the numbers being quoted such as “the market has fallen by x% today …  Billions have been wiped off stock markets” and so on. Mostly the figures quoted are correct but sometimes figures can be quoted out of context or not fully explained.

If, however, you were to take a calm perspective on matters you might see things differently. For a start, the total world stock market capitalisation was valued at US$69 Trillion (12 zeros) at the end of December 2014. Since then, markets moved upwards again before the recent fallbacks. If you hear that that Stockmarkets have lost, say, €200 Billion (9 zeros) worldwide then what has happened is a loss wordwide of less than 3%.

The last week or so has seen extreme volatility with daily moves, up and down, of between 2% and 5%. This is symptomatic of the times that we now live in. As each day passes we get increased access to information and commentary through our smartphones and tablets and less through PCs. Indeed in research published today (27 August 2015) by the web firm Statcounter, Irish people use their phones to access the internet more than any other country in Europe or the Americas.

Being in an “Information Overload” mindset can therefore lead to spontaneity of reaction to stock market movements both in carrying out transactions and in emotionally reacting to them. This being said it is not just an Irish thing. As a financial planner who is intricately involved in assisting clients of different nationalities resident in Ireland make investment decisions, our biggest task is to prevent our clients damaging their own wealth by reacting in the wrong way at the wrong time to stockmarket market movements.

The current Chinese turmoil is in reality a deep breath moment for many investors who have seen significant growth in investment portfolios in recent years. Such growth came on the back of significant falls post Lehmans and Bear Stearns. Composure of thought needs to be the order of the day and this needs reflection on the actual investment returns that have been experienced both in local stockmarket terms and in Euro terms for Irish investors.

As at yesterday evening’s close (26 August 2015) and this morning’s close  in the Far East, both the FTSE 100 and the Dow Jones are showing negative returns over the last 12 months and separately year to date when expressed in local currency terms, Sterling£ and US Dollar respectively. When allowance is made for exchange rate movements between these currencies and the Euro since, say, 1st January this year the actual return for Irish investors is still significantly positive. The FTSE 100 shows a currency adjusted gain of over 5% since January while the main US indices are returning 10%+ for Irish investors. If you are an investor and you got 10% in the last 8 months, I would say that such a figure is quite good going and would make any investor happy.

  Local Stock Market Percentage Change Currency Change To Euro Total Change YTD For Euro Investor
  1 Year 5 Years YTD  
FTSE 100 -3.93% -6.93% 17.48% 9.07% 5.14%
Dow Jones -7.12% -2.60% 60.44% 17.03% 9.91%
S&P 500 -4.47% 0.98% 82.33% 17.03% 12.56%
DAX 4.93% 7.57% 72.41% 0.00% 4.93%
CAC 40 11.35% 8.89% 31.34% 0.00% 11.35%
Nikkei 225 7.42% 21.56% 106.58% 6.84% 14.26%
Shanghai SE Composite -3.29% 41.92% 18.16% 3.16% -0.13%

So if the real figure is positive, what is all the fuss about? Again, it needs a sense of perspective to understand what has been going on. Firstly in stock market terms the Chinese market grew year to date to 12 June 2015 by 60% and on a 12 month look back at that same date had grown by 150%. In the last few weeks the year to date figure was shown a small loss of 3% while the 12 month figure still shows a gain of almost 42%. The recent meltdown therefore was a correction to bring matters more in line with normality especially when one considers that the cumulative gain for China over the last 5 years has been only just over 18%.

Not for one do I contend that the worse is over in either China or the broader global stockmarkets. Extreme volatility is still very likely in the short term but what investors must realise is that what is more important is time, not timing. Sometimes investors need to take a proverbial bloody nose to stay in the fight in order to win it later on. This is nothing new. Some 15 years ago a Californian Behavioural Finance Professor, Meir Statman, estimated that 94% of investment growth in a portfolio is due to client decision making and their own behavioural response to investment markets. This means that if investors lose money it is down to their emotive reaction to it. Similarly with investment gains.

No-one, despite assertions by many to the opposite, can outthink stockmarkets. Even Warren Buffett has admitted to getting some picks wrong and he is by far the cleverest investor the last 100 years has seen. Markets have a habit of turning quickly when least expected. For example investors who panicked and sold on Tuesday this week would have missed out on almost 6% gains across the board in the last 2 days. On average 6% p.a. is an excellent return for a diversified portfolio. To miss out on such an annual gain in a two day period shows how important it is to stay in the market.

What investors must realise is that stockmarket share pricing is intrinsically linked to geopolitical behaviour principally that caused by regulators, central bankers, military interests and politicians. This in turn influences the consumer landscape that publicly quoted companies trade in, make profits (or losses) in and are therefore valued on.

The best way to reduce such risk is to diversify investment holdings by asset class, sector, geographical region and currency. The confusion of the last few weeks has focused primarily on one asset class – equities. There is far more to investing than shares and more importantly there is far more to money management than investing. Good investment advice starts with a personalised financial plan which identifies personal cashflow needs for the coming years especially in the next 4 to 5 years. By knowing what money is required for personal expenses and keeping sufficient reserves aside the need to cash in on investments that might have suffered short term losses in value is avoided.

The bottom line is that a properly prepared personal financial plan trumps volatile stock markets any day, Chinese or otherwise.

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