Treece: Events do not shape marketsWritten by Ben Treece | | email@example.com
Without fail, any time a conflict hits the headlines, we at Treece Investment Advisory Corp. are constantly asked how we believe it will affect the markets. As investors, we tend to look for answers and meaning in every single gain or loss in the markets. Unfortunately, that is simply not always possible.
On any given day, when someone asks why the market went up or why the market went down, our answer is quite simple: There were more people buying than selling or vice-versa. It is imperative investors realize that day-to-day market swings will have a minimal if not inconsequential impact on your retirement savings.
While we have used the following example in the past, let us look back to Sept. 11, 2001. Following the attacks on the Twin Towers, the Dow Jones dropped almost 15 percent, but rebounded back to its old level in just two months. Similarly, after Iraq invaded Kuwait in 1990, the Dow Jones dropped by almost 20 percent but recovered entirely within one year.
Investors tend to give “one and done” events more credence than they deserve, believing that these singular events will result in market crashes.
We have heard similar theories applied to the conflict between Russia and Ukraine, or the uprising in Venezuela. There are certainly opportunities to make money given these short market moves. However, it is more likely that uncertainty will result in a temporary downswing in the markets.
In the long run, markets are not shaped by events, they are shaped by environments. For example, we previously demonstrated how the Dow reacted and rebounded to the 9/11 attacks and the Iraq/Kuwait conflict. Now if we take a look at the credit crisis in 2008, it took stocks and investors a few years to recover losses and gain the confidence to get back into the markets again.
That drop in value was not predicated by a single event; it was the result of lax monetary policy, poor interest rate policy and an unregulated derivatives market. Macroeconomic trends are what investors need to be looking at, not short-term, one-time events.
Understanding the psychology of investors is an incredibly difficult task, and it can be difficult to put fears and concerns stemming from short-term events to the back of your mind. We always remind clients that investing is like driving a car: You may hit a pothole here and there, but if you spend too much time studying that pothole through the rear-view mirror, you will miss the bend in the road and drive straight off the cliff.
Remember, events do not shape markets — policy and economics do.
Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp. (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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