How to respond to scary markets
It’s been an uncomfortable year for equity investors to say the least.
Stock markets around the world have fallen, some more than others. Russian stocks have crashed, and investors in some funds have been unable to get their money out.
But it’s not just the Ukraine crisis that investors are anxious about. There’s particular concern about rising prices — energy prices in particular — and whether the US Federal Reserve and the other big central banks will be able to contain rising inflation without causing a global recession.
Uncertainty is unlikely to recede anytime soon, and more market wobbles like the ones we’ve seen since early January are all but inevitable in the weeks and months ahead.
We want simple answers
At times like these, the human brain craves answers. “When the world turns upside down,” Jason Zweig recently wrote in the Wall Street Journal, “starkly simple views are reassuring. Yet it’s at those very moments that investors need to be even more sceptical about takes that smack of certainty.”
The problem is, there aren’t any simple answers. The Nobel Prize-winning economist Eugene Fama was recently interviewed in the New York Times and was asked what long-term impact he thought the Ukraine crisis would have on the markets. “I’ve learned not to make predictions,” Professor Fama replied. “Can’t do it. Who knows?”
All right, the journalist said. What about the economy then? Can a recession be averted? “I have no idea,” said Fama. “Unfortunately, Milton Friedman, if he were alive today, wouldn’t know either.”
If anyone should know the answers, it’s Eugene Fama. He’s spent six decades studying stock market prices. Yet he’s happy to admit that he doesn’t where the markets are heading, even in the medium-to-long term.
The point is, nobody knows what the future holds. Even if we did know how the Ukraine crisis will unfold, or how much further inflation will rise, profiting from it would be extremely hard. After all, no one expected markets to respond favourably to the Brexit vote or to the election of President Trump in 2016, but they did. And who could have predicted the extraordinary bull run that followed the Covid-induced crash of March 2020?
Do less — and preferably nothing
When markets fall, we instinctively want to do something to relieve our fear and anxiety. Yet the vast majority of investors, and certainly those with a proper financial plan in place that they’re comfortable with, should do precisely nothing.
To quote the popular US blogger Josh Brown, ”this isn’t like youth sports where practice makes perfect. Paradoxically, you want to do less in this environment, not more, to see yourself through to the other side. Effort will most likely hurt you here.”
Focus instead on things you can actually control. You can't control the markets; but you can control how you respond to them. You can’t affect the international situation, but you can, for example, give money to a reputable charity working to support the people of Ukraine.
So, stop checking the latest market data. Switch off all that breathless commentary in the media. Distract yourself. Read a book. Get some fresh air. As William Bernstein says, “the sooner you turn off CNBC, get out into the bright sunshine, and take a walk, the sooner you'll feel better about your investments.”
And one more thing: watch this video, which was commissioned by Patrick Geddes to accompany his excellent new book, Transparent Investing. And if you find it helpful, pass it on.
Remember, there’s no shame in feeling anxious about global events or the effect on your investments. It’s a perfectly natural human reaction. But don’t worry about things you have no control over. Only try to control the controllable.