With market volatility increasing, investor anxiety appears to be on the rise.
 Nick Garry
Issues surrounding the mortgage markets have led to the demise of several hedge funds and problems with certain financial services companies.
In turn, credit markets have become less willing to raise money to finance a number of projects, including leveraged buyouts for private equity firms. Because of the global nature of the market, fears have stretched to European and Asian markets as well.
On the economic front, there are both negative and positive indicators. Consumer spending continues to decline in the face of inflation, the housing market is weakening, oil prices continue to seesaw and geopolitical concerns remain.
Positive indicators include an expanding American economy and a global boom. As the U.S. economy has grown along with corporate profits, albeit at a slower rate, balance sheets for a number of America’s largest companies have been attractive.
Internationally, Europe and Japan appear to have improving economies, and Asia seems to be doing quite well.
So where do you go from here? When looking ahead, it might be useful to look at periods of previous market declines for some insights.
The reality is that market declines are a normal part of investing. During the 20th century, there were more than 50 declines of at least 10 percent in the equity markets. That’s an average of almost one decline every two years.
If declines of this sort have occurred routinely, why does this particular decline feel so painful?
Think back to the last time you had an extra glass of wine with dinner. You may remember because you recall how you felt the morning after. Yet there probably was a time when having an extra glass would have had little effect on your next morning’s routine.
So why does the same action produce different feelings? The answer is time.
Similar reasoning applies with the current marketplace. We’ve had declines of this sort before. It has been awhile, so it feels a bit more painful.
To put this in perspective, the current bull market dates back to 2002, making this one of the longer periods in market history between corrections. When considering the past, it does not seem unusual for the market to correct itself along the way.
At the same time, in spite of the many market declines in the past century, the equity markets generated attractive returns.
This is a period that might require some patience on the part of long-term investors. Market environments such as this are one of the reasons investors should have a well-diversified portfolio. Historically, individuals with well-diversified portfolios who remained invested in the financial markets have been appropriately rewarded.
Nick Garry is a CPA and personal financial specialist at Garry Associates LLP
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