By: Frank Armstrong, CFP, AIF
Horror, disbelief, sadness, anger, rage, frustration, impotence, depression and fear are the emotions cycle through me relentlessly. I desperately want to wake up to find that this has only been a bad dream, and that life will be the same way it was before Tuesday morning. But, it’s not to be. The sights and sounds will be etched in my mind forever. Frankly, I never expected to see anything so horrible. I cannot come to grips with the enormity of the evil unleashed upon us.
Most of you may be having similar feelings. We have experienced a catastrophe beyond our wildest nightmare. Now, it’s time to pull ourselves together, and begin the long healing process. We must honor our dead, comfort and care for their survivors, rebuild our cities, tend our souls, and restore our sense of safety. None of it will be easy. But, do it we will.
Terrorism’s main goal is to strike disproportionate fear into the victim’s heart and to remove his sense of security. It’s no accident that this blow fell upon the center of the world’s financial system, and the symbol of our military power. Markets reflect our fear and uncertainty with remarkable precision. We can predict a very turbulent ride after any disaster of this magnitude. We can also predict that after the initial shock wears off, markets will recover. They always have. Our past experience would also indicate that the long-term market effects of a random disaster are quite small. (See Chart)
I have seen estimates that economic damage may reach $25 billion. I have no idea what the final cost will be, but relative to an economy of our size and strength, the total cost is far from fatal. A small hurricane could easily do as much damage. However, the blow comes at a time when confidence had already eroded due to the worldwide economic slowdown. This fact has not escaped the attention of the nation’s press. Those same bright commentators that two years ago were so sure that the stock market would climb forever, are now speculating on a global collapse. Images of 1973-1974 are filling the airways and other popular media.
Try not to listen to that garbage. The world’s governments need not look on helplessly as economies tank. They have a variety of techniques to jump start economic activity when the political spine is properly stiffened. Last weeks events may supply just such a catalyst.
The reality is that no one knows when economies, or markets, will turn around. All of those so-called experts, you, my dog, and I are all entitled to our opinions. They all have an equal chance of coming true. None of us can predict how it will play out. More importantly, none of us should be trying to. Rather, we should be setting long term investment plans that accept random risk as part of the process. If our asset allocation plan properly accounts for our objectives, time horizon and risk tolerance, we should be immune from short-term volatility. I’m not saying that any of us should enjoy it. But, we must tolerate it if we are to be successful.
It would be a grave mistake to allow our emotions to prevail over a well-planned investment strategy now. Your best choice when markets re-open is to do nothing. Emotional decisions most often lead to bad choices, and mistakes that we can repent at our leisure. Civilization as we know it will not end. This week’s events offer a unique opportunity for shortsighted investors to shoot themselves in the foot. Don’t panic and don’t bet against an American economic recovery. You would have always been wrong before.
Our thanks to Financeware.com for supplying the chart and the historical information in this article.See Chart
“For some historical perspective, here is a chart that shows thirteen historic, traumatic, national events since 1946 where the S&P 500 had only three periods when the average closing price the month of the event was not exceeded within 4 months. In 6 of those events, almost half, the market was up the very next month. Only the 1987 crash and the 1956 Suez Canal crisis had markets that were lower for over one year.”