Analysis

by Trevor Keidan

Despite the temptation to panic, history teaches us that stocks recover

Phnom Penh - The old saying "look before you leap" is more relevant than ever with the financial crisis and stock market sell-off. Possibly the worst thing we can do is take ill-considered actions brought on by panic. We need to consider our every move.

 If we were to panic, take fright and sell, we would sell at a loss and would have very little opportunity to make back our money back.

On the other hand - even though there is no crystal ball - if we sit tight, there is a good chance that over time our investments will get back on track.

Although it is somewhat cliched, it is also true to say that as investors, we should have bought for the long term. We should also have planned carefully - or taken professional advice. Had we done this, we would have our investments spread across a series of products in order to protect ourselves.

Right now it might be a good idea for us to re-examine and re-balance our investments. However, rest assured that even without doing this we should be OK in the long-term - if we have planned properly.

The chances are that our investments will once again grow and achieve the results we had in mind when we first bought them.

If we believe US President George Bush and financial analysts, pundits and experts, then fear is the main culprit right now. And it seems to make sense. It is the fear that is causing ordinary people to do the irrational - or prevent them from doing the rational.

Bad news blues

One thing compounding investors' fears right now is the fact that bad news is almost everywhere we go and in almost every medium. News about the Global Financial Crisis has made the crossover from the specialist to the mainstream media - so when we look to our newspapers, TVs and even our internet, the first thing we see is the latest so-called daily  market ‘crash'.  

If we sit tight, there is a good chance that over time, our investments will get back on track.

It would appear that we are all in the grip of panic. It is contagious. Many of us have stopped buying stocks or taking loans and many of us have started distrusting our banks and other institutions to be able to weather this financial storm. It is this panic and distrust that has frozen credit markets and is in danger of freezing economies as we know them.

With all this in mind, it is important for us to remember that had we invested US$10,000 in equities in the S&P 500 in 1983 our investment would have been worth $199,763 at the end of 2007. This represents a growth of almost 20 fold.

During this period we would have had to weather the market crash of 1987, the Asian stock market crisis in 1997 and the Enron scandal in 2002.

Admittedly, we are dealing with what appears to be more serious than anything that took place between the years 1983 to 2007. However, there have been other financial crises of note:  

Past setbacks

1929: The Wall Street crash.

By the time the market had reached bottom in 1932, shares had lost 90 percent of their value. This caused general panic where people stopped buying consumer goods such as cars and houses. The crash of 1929 led to the Great Depression of the 1930s.

1987: The 1987 crash.

The Dow Jones Industrial Average Index in leading US companies dropped 22 percent. This did not have a direct link to the overall economy but did affect the UK housing market and sterling currency.

2000: The Dotcom crash.

Internet and technology stocks plummeted from March 2000 to October 2002 with the Nasdaq index falling 78 percent after investors lost faith in what were considered "favoured" IT and technology companies in the 1990s. The crash had repercussions on other parts of the economy and exacerbated the crash after September 11, 2001.

And while what we are facing now is very serious and made even more desperate because of fear and panic, it is worth noting that we have bounced back from significant crises in the past - and we will again.

If we are worried about stocks, banks, bonds and funds right now, once again, there is always gold. It would appear that the cost of borrowing gold is going up because central banks are allegedly hoarding the precious metal. This in turn could push the price of gold up considerably. It is said that it could even reach $2,000 per ounce over the next six months.

 So let us please remember that although there is a lot of bad news around right now, panic and fear is also taking its toll.

So before we do anything we should always "look before we leap".

After all, Your Money Matters!

_____________________________________________________________

Trevor Keidan is managing director of Infinity Financial Solutions.

Infinity Financial Solutions provides impartial, tailor-made

personal financial advice to clients in Cambodia and Southeast Asia.

Should you wish to contact Trevor, please send an email to [email protected].