I thought I would send this article in light of recent market declines. Over the past days and weeks, markets have been volatile, to say the least. The growing view by professional money managers is that it is a case of countries having financial difficulties and not companies. In fact, many companies remain in excellent financial shape. Here is a summary of key market events and some guidelines to help you stay on track.
The background: Lingering European debt problems and a new crisis in the U.S.
Underpinning much of the current market volatility is the ongoing European debt crisis. Europe has a solid core of Northern European countries (principally Germany), but also a debt-challenged periphery including Greece, Ireland and Portugal. More recently, liquidity concerns have included Italy and Spain. An increase in interest rates in these countries diminishes the market value of government debt held by many European banks.
With the European debt crisis still unresolved, the U.S. has now created a crisis of its own. In 2009, the U.S. was able to raise its debt ceiling to support its stimulus program, with very little media attention. However, in 2011, a second attempt to raise the debt ceiling turned into a high profile political wrestling match, with the Republicans and Democrats looking to include fiscal policies in line with their beliefs. As negotiations dragged on towards the August 2 deadline, the prospect of higher default interest rates on government debt put already skittish markets on high alert. Ultimately, the Republicans and Democrats reached a deal imposing limits on both debt and government spending on July 31. After the legislation was passed by both the House and the Senate, President Obama signed the Budget Control Act of 2011 into law on August 2.
The trigger: Standard & Poor’s downgrades U.S. debtOn Friday, August 5, ratings agency Standard & Poor’s downgraded U.S. government debt from AAA to AA+. The reaction from investors was swift and significant: by end of trading on Monday, August 8, most markets, which have dropped steadily the past few months, fell sharply. Uncertainty around the debt situation means the prospect of continuing global market volatility is likely to remain until concrete action is taken.
The key for investors: Look beyond the headlines
I recognize market events such as this are hard to ignore, but it’s important for us to look beyond the headlines. While many stock markets have declined on debt fears, corporate balance sheets are actually in good shape. Furthermore, company valuations are reasonable, which means the current spate of volatility represents an opportunity to buy solid companies at good prices.
My message to you: Stay focused and invest with quality
In this, or any market crisis, sticking to these actions will help ensure your financial plan stays on track:
1. Focus on your plan. Declines in equity markets have probably disrupted the investment mix of your portfolio, which may warrant rebalancing. I can help you rebalance to ensure your portfolio continues to reflect your financial goals, timeline and risk tolerance.
2. Use proven money managers. Experienced money managers can help investors take advantage of the unique opportunities volatile markets present. They also understand the long-term benefits of sticking with a proven investment approach and fundamentals such as diversification.
3. Stay invested. Staying invested by contributing fixed amounts regularly allows you to purchase more units or shares when prices fall. When markets bounce back, you’ll be that much further ahead.
4. Talk to me. As your advisor, I’m always happy to provide advice, no matter what’s happening in the markets. If you’d like to talk through the impact of recent markets on your portfolio, feel free to contact me; that is what I am here for.
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