The news is flooded with doom-and-gloom scenarios coming out of the crisis in Japan. The devastation and loss of life are tragic and our prayers go out to everyone affected in the region. As a member of the financial community, this type of situation typically means that people begin frantically asking for our predictions and theories about how it will affect the economy. Unfortunately, it's impossible to predict what will happen. Just like it was impossible to predict what was going to happen the day prior to the bottoming out of the S&P 500 two years ago. In order to understand the complete lack of predictability we are faced with, let's take a look back over the past two years.
We recently reached the two-year mark since the market low of March 9, 2009 when the S&P 500 hit a low of about 676. To put this low into perspective, one should note that investors have to look back to 1996 to find a time when the market last registered that index level.
As I wrote about in a previous blog post, the S&P 500 has nearly doubled in two years. Small caps have performed even better off the bottom, which is not unusual and has been the topic of several blogs I wrote at Off The Wall. Over the same period of time that the S&P 500 has nearly doubled, the Russell 2000 index, a good index for tracking the performance of small-cap stocks, has rebounded nearly 140 percent.
In spite of this incredible recovery, when you look back at the news from March 2009, there were a lot more people declaring there was more downside to come in the market, that deflation was probable, and that we were sure to see a continued recession, than there were declaring that the market was about to recover—especially to the extent that it has.
My point is: One can never predict what will happen in the market, and the last two years is a perfect example of this. However, there are things investors can do in uncertain times.
So what is an investor to do now, in the face of a potential nuclear meltdown?
It's that simple.
Since few people have the guts to go "all in" during a time of crisis and when the market has sold off, the best bet is to never put yourself in a position where you actually have the ability to go "all in" in the first place. Betting everything you have right now implies that you've sold and have cash on hand.
If you have a 50-50 chance of being right when you sell and then a 50-50 chance of being right when you get back in, that's a 25 percent chance of being right on both trades. Those are bad odds.
So what should you do if the reactor experiences a meltdown? Some may say follow your gut. Others may say follow the consensus. Few may even say to do exactly the opposite of the consensus.
I think that's all bad advice. I think the best thing to do is to follow your financial plan and its associated investment strategy.
So, what should you do about Japan? Stick to your plan.
David B. Armstrong , CFA, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010 based on assets under management) and has been interviewed by several national media sources over the past several years. David and Monument Wealth Management can be followed on their blog Off The Wall, their Twitter accounts @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Asset allocation does not ensure a profit or protect against a loss.
Stocks of small companies involve greater risk than securities of larger, more established companies, as they may have limited product lines, markets and/or financial resources and may be exposed to more erratic and abrupt market movements.The Russell 2000 Index measures the performance of the 2,000 smallest companies in the U.S. stocks, serving as a benchmark for small cap stocks and mutual funds. The weighted average market capitalization for companies in the Russell 2000 is about $1 billion.