Some things never change
It’s been a painful 6 months for stock markets worldwide. We’ve all felt the impact of the current crisis and the ripples it sent throughout global economies.
Ominous news is all around and waves of hacks and slashes in many corporations are clouding the sky. However, if I were to ask the average Joe just by how much exactly did global stock markets drop what would be the average response? I believe it would paint a much darker picture than things really are (I certainly hope so).
I felt I needed the following chart to clear things up a bit. It describes how well (or how badly) stock markets did the in the last 6 months:
We’re still in a crisis but I believe it could have been much worse. Hopefully I’m not wrong. We can learn quite a few things from this graph.
#1 The media thrives on an atmosphere of crisis and intimidation
There have been crisis before and there will be again. Every time the crisis we face at the present seems to be the hardest. No wonder, it’s happening right now. It’s important to keep everything together and not get overly excited. This is the nature of stock markets and humans.
#2 There is a direct link between risk and return
Emerging markets may generate high returns but they also come crashing down first. About half a year ago the prevailing truth was that China and neighboring stocks markets, mostly emerging markets, are now relatively independent and may not suffer from the US crisis. We all got a pretty good lesson in globalization.
Russia lost only 5% this year. This could lead to mistaken conclusions on the nature of risk and return. Russia is one of the more risky stock markets of the bunch and has done so well due to skyrocketing oil and commodity prices and the many natural resources which are abound in Russia. Should oil prices drop (as I’m quite positive they will, in the near future, half a year or a year from now) Russia will suffer as well.
#3 When it’s raining everybody gets wet
Diversification will only get you so far. We cannot diversify the market risk only specific risks. If the market, as a whole, takes a dive, we all follow. Defensive industries often thought as safe havens in turbulent times. They are indeed, but don’t expect brilliant or even positive returns.
#4 Opportunities aplenty
It’s not possible each and every single company is now worth 20% less. Therefore, there are opportunities and they are plentiful. It’s getting the right ones that’s the tricky part. We have two options:
- Either try to locate the more attractive stocks using analysis, analyst recommendations and Wigi boards. Or;
- Take small timely dips into the market buying a bit every week or month slowly accumulating a nice investment with a very attractive average buy price. By using dollar cost averaging on an index you won’t get rich or get phenomenal returns (risk and return again) but you will be able to capitalize on low prices. I’ll write about this technique in detail later this week.
Happy hunting.commodity prices, global stock markets, global stocks, Important, Lessons, Look, oil, return, risk and return, risky stock