This week sure has been a wild one! It has been some time since we have had this kind of volatility, so it has come as a shock to some. Let’s look at the triggering event for this volatility, and what relevance it has to long term investors.
The Chinese stock market has not been strong lately. Below is a chart of the Shanghai Composite (curtesy of CNN Money). Notice how volatile their market is. This is because their market is largely dominated by individual investors (retail investors). Little investors like me and you. Contrast that with the US Market (S&P 500 index in the chart) which is largely dominated by institutional investors. Notice how much of a run up there was before this crash; almost a tripling of value. There are two major forces that always drive markets: fear and greed. This is clearly and example of the later.
The volatility in the Chinese stock market has had spillover effects into other global stock markets, at least in the immediate term. It is a globally connected world today, so this is not to be unexpected. But it is important to take an assessent of what markets have done as a whole year to date and see if that is in any way out of the ordinary.
As of 8/25 the S&P 500 (large US stocks) are down about 8% year to date. International stocks as a group have actually done better, down about 6% (as measured by the MSCI ACWI ex US). The point being, none of those numbers are in fact, unusual. How many years, on average are negative in the US Market vs positive? One in 10? One in 6? Well, going back to 1900 it has about one in every four years. If you are going to be a successful long term investor, you have to accept that 3 steps forward, one step back is an inevitable and expectable part of the process. Because the media is very interested in selling fear, they will sensationalize what is going on, and try to paint the direst picture possible. Don’t be fooled. Bad investment decisions are made in the heat of the moment. Remaining grounded, calm, and sticking to the plan are the keys to long term success.