Less than three months have passed, but perhaps you’ve already forgotten what you were doing back on August 21. It was a big deal at the time, but it quickly came and went.
I’m referring, of course, to the eclipse — the first total eclipse of the sun in 99 years that crossed the entire country.
Millions of Americans viewed it through filtered glasses, and some (including Jean and me) traveled far to view the totality.
The eclipse was fun — but eclipses weren’t always viewed that way. Ancient cultures believed a mythical creature was taking a bite out of the sun or devouring it entirely.
Some believed they shouldn’t breathe during an eclipse, or cook or clean clothing, because the air was contaminated. Eclipses were blamed for wars, diseases and deaths. In Babylon, stand-ins were placed on the throne during eclipses so any harm would come to them instead of the king.
Today, of course, we know that solar eclipses are caused by the orbiting moon passing in front of the sun, casting its shadow and briefly blocking our view of the sun. We know it’s nothing to be afraid of. For us, the solar eclipse was a good reason to throw a party — and there were lots of them around the country on August 21.
But what does this have to do with personal finance?
It provides a good analogy of how some investors allow irrational fears — often stirred by news events or pundits who make wild predictions — to influence their financial decisions, especially their investing strategies.
For example, we’ve received phone calls and emails from folks nervous about the nation’s rising tensions with North Korea. Might Kim Jong-un’s bellicose actions and a U.S. response trigger a stock market crash?
Others have expressed worry over recent terrorist attacks in France, Belgium, the United Kingdom and Spain, wondering if further attacks will damage our economy. Civil unrest and protests nationwide are also on many people’s minds. Ditto for political tensions with Russia, China, Iran and even Venezuela. And let’s not forget to mention tension in Congress, which appears deadlocked and dysfunctional.
Could any of these cause a sharp decline in stock prices? What does it all mean for your investment strategy? How should you respond to negative news?
To answer, it might be helpful to look at events that worried many investors in the past, to see how those events affected the financial markets at the time.
We needn’t go back very far to start. Remember Brexit — when the United Kingdom voted on June 23, 2016, to leave the European Union? Many thought the decision would lead to financial problems globally, and indeed the S&P 500 stock index fell 5 percent within a few days. But a year later, it was up 21 percent.
Remember when Greece defaulted on its debt? During the run-up to that event, Standard & Poor’s downgraded Greece’s debt to junk status in April 2010, after which the S&P 500 index fell 16 percent over the next 10 weeks. But a year later, the index was up 31 percent.
Let’s go further back. In Chapter 37 of my national best-seller The Truth About Money, you’ll find a chart showing how the S&P 500 performed during and after several past “crisis” events. Here are a few excerpts:
- Remember the Russian satellite Sputnik? (If not, ask your grandparents.) It was launched in 1957 — prompting fears that the Soviets could drop bombs on the United States from outer space. The S&P dropped 10 percent in three weeks, but six months later it was up 8 percent and by the following year it was up 30 percent.
- When Richard Nixon resigned the presidency in 1974, the index fell 19 percent in five weeks. But it was up 30 percent after six months and up 27 percent the next year.
- After the 9/11 attacks, the index fell 12 percent in two weeks, but it was up 7 percent after six months and up 16 percent the next year.
- After Hurricane Katrina, the index dropped 2 percent in six weeks, but was up 7 percent six months later and up 10 percent the next year.
The lesson is simple: When unsettling events take place, don’t react like those of ancient times. Instead, stick with the long-range financial plan your planner helped you develop. Although past performance doesn’t guarantee future results, you can rely on your planner to work in your best interest if and when turbulent times arise.
If you have family members or friends who don’t have an advisor to help guide them through turbulent times, please refer them to us. We’re happy to help.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
The Truth About Money. The Washington Post, Washington Bestsellers Paperback Nonfiction/General. 1998.