I have always enjoyed roller coaster rides, but in part I think my enjoyment came from knowing when and where the ride will end. The past three weeks or so the financial markets have provided that same feeling in the pit of my stomach as many coasters have, only this time I am not sure when the ride will end.
Turmoil can be found around the world, and this makes investors quite uncomfortable. There is the famine in the Horn of Africa impacting thousands if not more; the war in Afghanistan and Iraq continues and the price to Americans is high no matter how it is measured; the heat wave so many Americans have endured this summer; riots in London making parts of the city appear as though a war has occurred; the downgrading of U.S. debt; the potential debt problems with Greece, Italy, France, Spain, the toppling of several foreign governments and perhaps others… All of these events could make for a great novel if they weren’t reality.
A reader might ask, “Do I believe the days of ten percent annual returns are gone forever?” For now, my response would be “no.” Although it is clear the investment markets have changed. I believe at least four factors have added to the volatility which has increased during the last ten to fifteen years. These factors are the increased utilization of the Internet, the broad use of investments, electronic trading capability and use, and the interconnectivity of the world’s economies. All four of these occurrences have brought many positive outcomes to the market and Americans, but I believe they have also contributed to some of the increased volatility we have and are experiencing.
The days of old news is gone. With the benefit of the Internet, anything that happens across the globe is instantly known. The investment markets respond to this instant knowledge often before the full and complete impact is actually understood. And with so many more of the general public investing, whether it is through their 401-k plans, individual retirement accounts or brokerage accounts established with one of the many discount brokerage firms, when the public move in harmony, whether buying or selling, their volumes are no longer small, and thus the impact on the markets can be significant. The use of electronic trading whether by individual investors or market makers is also having an impact. For individual investors the day when they had to enter their trades through a broker are gone, and thus many are not working with an advisor. So when they enter their trades electronically, for some and perhaps many, their trades can be based upon emotion rather than facts. The computer generated trades by the large trading firms also add to the volatility and sometimes chaos in the markets. Lastly, the majority of the world’s economy is no longer limited to ten or so countries around the globe. With the development of intermodal transportation and super container ships, suppliers are no longer next door, but can be around the world.
None of these four factors are likely to go away. In fact, each should continue to expand during the next decade. As such, it is my belief market volatility will continue, although the frequency of four to six percent moves one after the other most likely will remain rare. It will be important to understand that as our indexes grow in size, the size of the point moves will be less important but the percentage move should be the key to watch.
Time may play a favorable part in the market’s volatility with normal trading ranges returning as investors become more accustom to large moves; response to a larger than normal move may not create a reactionary move of equal proportion.
If this does continue, using the sell offs as opportunities to select and purchase key holdings may provide the occasion to achieve higher than average returns in the market.
For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.