US political turmoil: Don’t start panicking
Will President Trump be impeached? Is the political turmoil in the US about to sink financial markets? Jack Welch, the former CEO of General Electric, told CNBC on Wednesday: “An impeachment proceeding would blow the market away.”
I have received many phone calls over the last few days from clients starting to get nervous over the US political turmoil. I point out that it is impossible to time the market, and history is full of people who tried and lost out. It’s also full of people who stayed fully invested and are much wealthier for it.
History
I am not going to go into the Trump issue other than to point out the hypocrisy of the media and why there was no outcry over the Clinton email scandal, which was all about passing of classified information. While I have a lot of respect for Jack Welch, how does he know that impeachment hearings would “blow the market away?” In fact, I actually looked back to see what the market reaction to Bill Clinton’s impeachment hearings was and found something that was not surprising to me.
In the summer of 1998, the market dropped by more than 10%, which is just a normal market correction and, as I have pointed out in this space countless times, is something that occurs very often. The market started moving up in late summer, and from December through February 1999, which was the time period when the House of Representatives voted to impeach and the Senate didn’t, the market actually continued moving higher. So if we can learn anything from recent history, it’s that Mr. Welch predication isn’t worth too much.
Time the market?
I mentioned that I have started to receive calls from clients getting a bit nervous. One of them asked me what I thought, and I said since she has a 20-year horizon, trying to time the market is silly, and she should stay the course. We then went back over her long-term returns and found that because she stayed fully invested during the subprime crisis of 2008, when the stock market dropped more than 30%, she still doubled her money if you look at the account value before the market crash. That was eye-opening for her and convinced her to not panic.
One of the biggest risks of trying to keep timing the market is the potential of “missing” the market. This occurs when an investor, thinking the market will go down, reallocates her investments and places them in more conservative investments. While the money is on the sidelines, the market shoots up. This means that the investor has incorrectly timed the market and “missed” the best-performing months. There have been numerous studies done to illustrate how much an investor can lose by being out of the market.
Myra O’Dell of BCS Wealth Management writes: “Investors who attempt to time the market run the risk of missing exceptional returns. For example, the last bear market that we experienced began in 2007...
“The value of a $100,000 investment in large-cap stocks during the period 2007-2014... dropped to $54,381 by February 2009. If an investor remained invested over the next 70 months, the ending value of the investment would be $172,425. If the same investor exited the market at the bottom to invest in cash for a year and then reinvest in the market, the ending value of the investment would be $112,340. An all-cash investment at the bottom of the market would have yielded only $54,569.”
Time horizon
Remember that short-term volatility happens all the time, and markets can and will drop.
The most important aspect to determine how to react to market jitters is to figure out what your time horizon for the investment is. If you have a short- to mid-term time horizon, you have no business investing heavily in stocks. If you have a seven-year or longer outlook, then short-term swings shouldn’t cause worry, and you should keep your eye on the long-term performance of the stock market.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.