Market declines - what now?
The recent market declines and current increased volatility in share prices have investors ask themselves once again if this may be the time to bail out of the market or if it may be the right time to get into the markets.
Markets have performed very differently on different sides of the Atlantic so far this year.
While the FTSE 100 is down 9% year to date, the German DAX index is already in "correction" territory with a decline ytd of -12.7%.
A generally accepted definition of "correction" is a decline of 10% from the peak and while the larger companies are not quite there (FTSE All share: -9.4%) the FTSE 250 of medium sized companies is down -11.5% and the FTSE AIM All share of fledgling companies has retreated -13% ytd.
The big question is, are these prices buying opportunities or is this correction going to continue and even lead to a fully fledged "bear market", generally defined as a decline of minimum 20% from the peak.
The honest answer, of course, is that nobody knows! My Crystal ball is as good as yours or anybody else's. As always, the case can be made for both sides. There are plenty of risks out there (MP's vote on Brexit, Trade wars, Geopolitical risks) that could easily upset market participants and lead to lower share prices.
Not least an inverting yield curve, where short term interest rates are higher than long term interest rates (eg 2year treasury higher than 5 year treasury, as happened yesterday) are spooking investors, as an inverted yield curve has been going in tandem with economic recessions in the past.
All that being said, this should only be of limited interest to the serious long term investor. We do know that recessions occur frequently and are subsequently followed by economic upswings.
This, according to the last 5000 years of history is as certain as day following night and spring following winter.
Now, to stay with this analogy, if indeed we are in either late summer or autumn of the stock market cycle, then we should expect winter to arrive in the not too distant future (Bear in mind that this year, on 24.October, we still had temperatures of above 20*C and glorious sunshine, so autumns can last longer and fare better than generally expected).
That being the case, taking some profits (reaping the harvest - autumn) and holding a higher than usual portion of cash (the seed for next spring) should be the case for most investors. Please bear in mind that this higher cash position can also stem from dividends paid and not immediately being re-deployed, rather than from actual selling of high quality investments.
Think of your high quality investments as your field: While you may not be able to do much with it in winter and it won't "yield" anything in that time, as a farmer you would not sell your field just because of that, as you KNOW that the next spring will be coming and you need to own your field by the time it comes around.
You will then be able to sow your seeds (cash) that you held back from the last harvest, seen it grow into the next summer.
And while every investors situation is different, in our analogy we all have different size fields, harvests and seeds, the principle is the same for us all: in order to do any farming, you will need to own your land/field in the form of high quality investments as well as some seeds (cash) for when the next spring comes around.