Volatility is back again and its going to stay for a while. Do not fear it. It is not your enemy, it is your friend. I know that in the midst of this global economic war that that sounds strange, so I'll explain why.
First of all, high levels of volatility are a perfectly normal market phenomenon. Extreme volatility happens in 7 year cycles. So lets look back from 2008:
2008 - Credit crunch, subprime crisis.
2001 - 8 months of negative growth from March 2001 until November.
1994 - Mexican Peso Crisis leads to a halt in capital inflows in emerging markets.
1987 - BLACK MONDAY! A 22.6% crash, even bigger than that of 1929. The savings and loan crisis also begins risking the homeloans of millions of Americans.
1980 - Inflation in the US surges to 14.76% and unemployment to 7.6%. In the US,
unemployment will eventually get close to 10%.
1973 - Oil crisis as the Arab states flex their economic muscle and the beginning of
what was(until then) the deepest recession since WW2.
1966 - A 16 year Bear market begins.
1959 - Final year of a recession which began in 1957. US autosales fell by 31% in 1957 and
correspondingly unemployment reaches 20% in Detroit.
I may have got carried away with this theory but for a reason. I want you to answer this question:
"Would investing during the recession of 1987 have been a good time to begin an investment? Or 1994? Or 2001?"
Of course it would. Anybody who'd started a long term investment in those years would have made a fantastic profit.
What stopped people from doing so? Irrational fear.
Why irrational? Because all recessions come to an end and buying now, whether with a lump sum or as part of a regular savings plan is to buy at high discount. US equities are now available at 1997 prices and the FTSE is trading as if it was 1996. These really are bargains.
The trick is always to be able to find perspective in chaos. During the Great Depression in 1932 at his inaugural address, Franklin Delano Roosevelt said “The only thing we have to fear is fear itself”.
Facing up to that fear will ultimately reap fantastic profits.
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