Lo Shanghai Composite Index has more than eroded all the gains accrued since the beginning of the year, the European stock index Euro Stoxx 50 is very close to doing so, while since January theS & P500 lost more than 8%, theVIX volatility index saw the largest increase in just a few days in its history and the commodities are at a 16-year low (with oil prices below $40 a barrel for the first time since 2007).
Mainly shaking markets is China's murky economic outlook, casting shadows on global economic growth. The uncertainty about the FED's future moves and the ever shaky Greece, grappling with the resignation of Prime Minister Alexis Tsipras and the early elections in September, do not help either.
It is normal for many savers to feel shivering. Then it is worth inhaling deeply and reflecting, avoiding missteps. Here are 6 mistakes to avoid absolutely.
1) Ignore the facts
Don't get overwhelmed by the chatter: look at the facts. Government bonds of countries considered safer (United States, Japan, Germany) have historically very low yields. Therefore, on average, the operators (primarily the pension funds of the Developed Countries, in chronic deficit due to trends demographic and economic seculars) earn little from fixed-income investments and have an urgent need to invest in hopefully more profitable assets. The drive to invest in stocks is therefore strong. And the valuations of shares in the world are not too bad, a few numbers are enough to realize it:
- il P / E of Grahm & Dodd for Developed Countries (simple arithmetic mean of Europe, USA and Japan) is now equal to 20, against a historical average of 29 (the lower the P/E, the cheaper the shares, other things being equal );
- the report Price/Book value of the same aggregate is 1,7, while the historical average is 2 (and the lower the Price/Book, the more convenient the shares can be considered);
- il Dividend Yield it is 2,7% per year, compared to a historical average of 2%; in particular, in Europe, the Dividend Yield is now equal to 3,9%, while the yield of the Bund is equal to an asphyxiated 0,64% per year – therefore we have a greedy 3% difference between dividends and bond returns.
The implied volatility in option prices these days has reached 40% in the USA (VIX index), but in Europe (VDAX index) it has not exceeded 24%. Keep in mind that during the Lehman crisis, the VIX exceeded 80%.
It's been a bad week for the stocks, undoubtedly, but not even that extraordinary: using the data of the US stock index Dow Jones collected from 1899 to today, and sorting the losses from the most serious upwards, those of the last 5 days are in twentieth place.
Furthermore, monetary policies remain accommodative in large parts of the globe. In particular, the Chinese central bank has a decent arsenal at its disposal to respond to the stock market crash and the flight of funds, revitalizing the Chinese economy. Which, however, it should be remembered, grows between 5% and 6% per year (just to put things in perspective, the puny Italian GDP is growing, according to the latest ISTAT data, at an annual rate of 0,5%).
2) Forgetting the nature of financial markets
This Sell-off it's mostly about stocks. And stocks are mostly profitable over the long term. I recall that from 1900 to 2014, according to the highly authoritative Credit Suisse Global Investment Returns Yearbook 2015 edited by E. Dimson, P. Marsh and M. Staunton of the London Business School:
- shares have returned on average in real terms (ie net of the erosive effect of inflation) the 4,4% per year (5,5% since 1965);
- medium-long term bonds instead made the1,6% real per year (4,9% since 1965).
And from 1900 to today, everything has happened: world wars, social and technological revolutions, pandemics, and so on. I think it can be said that the sample is highly significant.
There is nothing abnormal about volatility and sharp declines in stock market indices: these are the financial markets, gentlemen. It is a highly unpredictable and highly ungovernable complex system (unfortunately, humanity has not yet found a better way to allocate savings). It is not said that this system will last forever, indeed human history teaches that it is rather unlikely, but it is certainly not a few (very) negative Stock Exchange sessions that decree its end. It takes much more.
3) Twist your investment strategy
China is down 8% year-to-date. But I hope you haven't invested all your assets in Chinese or emerging market stocks. Hopefully, you have a well-diversified portfolio, defined in a moment of tranquility in a way that works for your goals. If you have a Premium Wallet or an Express Wallet, theasset allocation for months she has become more defensive. Now, answer this question: Did the fact that China's PMI came out lower than expected and the VIX at 33% radically change your goals?
So think ten times before drastically changing your investment strategy. Common sense, self-knowledge, portfolio diversification and patience are the best weapons to overcome these moments of great uncertainty.
4) Getting overwhelmed by the news
The media go to bed with stock market drops, volatility and similar niceties. Unpredictable and often violent short-term fluctuations have the power to make you nervous and distract you from your long-term goals: keep them at arm's length. So stay up to date, monitor your portfolio, but don't overdo it. Pay attention to the signal, that is, to the substantial facts and numbers, not to the noise of the news that buzzes in the air like mosquitoes.
5) Follow foolish preachers
The market abounds in colorful subjects offering more or less bizarre financial advice: be careful, when the market is more turbulent, you are more afraid and therefore vulnerable to their bizarre calls.
Nobody knows what will happen tomorrow, or next week, or next month. Anyone who claims otherwise is a charlatan. Because no one has strategies trading magic that always wins: many of these supposedly exceptional investment strategies are the result of chance, others speak for themselves.
6) Pretend nothing happened
Overcomplacency and overconfidence are also a mistake. Check that the wallet has aasset allocation reasonable, that is sufficiently diversified and has expected risk indicators that are acceptable to you, so as to avoid catastrophes, as far as possible. Make the necessary changes to the portfolio, if necessary. Focus on what you can control, and don't chase the market timings perfect, that is a chimera.
