Like many manufactured products, today’s increased market volatility can be stamped “Made in China.” Numerous analysts blame current world market volatility on China, because its growth fell below predictions (or should we point our fingers at the analysts for flawed predictions?). China’s weak growth means her factories imported fewer commodities (such as oil and steel) slowing manufacturing output. Lowered demand for manufacturing basics caused commodity prices to fall further, so that every country that relies on selling commodities as part of its GDP was hurt. The ripple effect continues to touch many economies, including America.
Many countries suffering from economic problems are close trading partners with the United States. Foreign woes make it difficult for countries like Greece and Russia to maintain their traditional levels of purchasing American exports. Couple this with the strong U.S. dollar, which makes American goods even more expensive for overseas purchasers who are experiencing their own economic doldrums and you can see how foreign economic woes impact the American economy. Unfortunately, there is a downside to a strong dollar.
Can you drown in a riptide?
In today’s global world, economies are tightly connected, so commotion in one market has only a short path until it reaches other countries. Automatic trading systems and computer programs mean that significant transactions occur without a single human being actively involved (past the programming stages). And when real investors do get involved, consumer confidence and emotions play a huge part in investment decisions. Social media (regardless of their accuracy) spreads fear and uncertainty around the globe with a single tweet or Facebook post.
How to save your investments from the market’s riptide
As a private person working to save for retirement, you may not want to focus on global issues, but you have no choice. Private investors can’t bury their head in the sand and hope the storm passes without leaving its impact on their investment accounts.
Anyone who has been caught in a riptide knows the way to emerge unscathed is not to ignore it and not to fight it. The metaphor of surviving a riptide and today’s markets are the same: Don’t panic and avoid being swept out to sea.
A rip current will probably not pull you underwater, but only take you further from the shore, i.e., your investment goals. Stop struggling, or in economic terms, stop random trading, and swim parallel to shore (stick to your ideal asset allocation in your financial plan) until the tide ends. Riptide victims drown not because they are swept to sea, but because they exhaust themselves fighting the current.
As long as your financial plan is solid and you keep calm and focused on your long term goals, the current market madness may toss you around, but need not leave significant long-term damage. Understanding current market volatility underscores the importance of a solidly constructed and well-diversified investment portfolio.
For further analysis of the chaos in today’s markets and how individual investors can protect themselves, listen to this 10-minute podcast.
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Douglas Goldstein, co-author of Rich As A King: How the Wisdom of Chess Can Make You A Grandmaster of Investing, is an avid chess player, international investment advisor, and Certified Financial Planner (CFP®).
