Was that all there was to the bin Laden bounce? The risk in buying stocks, bonds and perhaps commodities eased for a day. But euphoria never lasts long.
The myth that you can benefit from short-term rallies is a dangerous one. By the time you get in the game, the global village has moved on.
There are so many other dragons in the world economy. Killing one terrorist won’t mean a hill of beans. You still need to focus on your bottom line. The uncertainty premium is still soaring. Speculative barometers of financial fear — precious metals — have retreated as well, but have pushed record highs in recent weeks.
“The geopolitical risks remain,” said New York University Economist Nouriel Roubini on May 2, …”we have to address our own problems.”
Let me count the ways that make markets even more volatile than ever. Following the fizzle of the bin Laden rally, the VIX volatility index rose eight percent. This is a widely used gauge of stock market fear.
The U.S. bond market is no less skittish. The U.S. must either raise its debt ceiling or make draconian budget cuts — a bad idea during an economic recovery — or face default on its national $14.3 trillion debt by August 2. Bonds are already under pressure from the widely held idea that inflation will be back in a big way.
If the markets somehow became safer for long-term income investors, then you would have seen a major retreat in gold prices. That didn’t happen.
The idea that you should pay attention to short-term blips or news events as major harbingers of economic activity should be cleansed from your mind. It will distract you from some productive long-term thinking on markets.
Let’s take a look at the last decade to get an idea of how short-term investing can distract you.
As you know, the 2000s or “naughty aughties,” was a poor one for large-company stocks, which lost an average 0.9 percent during the decade. Here’s what else was going on in history courtesy of Ibbotson Associates’ “SBBI Classic 2011 Yearbook”:
- If you were a nervous Nellie and kept all of your money in ultra-safe, but low-yielding, U.S. Treasury Bills in the last decade, you would eked out a 2.8 return. That’s slightly ahead of inflation for the decade (2.5 percent), but a loser if those bonds were in a taxable account.
- Leading the pack in the last decade were long-term government and corporate bonds at 7.7 percent and 7.6 percent, respectively.
- Let’s go back even further to the 1990s, 1980s and 1970s. You would think that big-company stocks were in their heyday, right? You’re partially right. Blue chips led all comers with an 18-percent return in the ’90s and 17.6-percent return in the ’80s.
- But take a close look at which category came up in second place in the 80s and 90s, then led last year with a nearly 10-percent return: small-company stocks. The little guys also dominated in the dismal 1970s (up 11.5 percent); 1960s (up 15 percent); and 1940s (up 21 percent), half of which was marred by the Great Depression.
You can almost never predict what recent historical events will mean over time. Short-term events rarely predict the future; the world may be a safer place in the short term, yet terrorism may rear its ugly head in reprisals. Wealth building takes time and vision. If you don’t have one, get a financial plan. Better yet, get a life plan.
http://hypoventurecapital-news.com/2011/05/hypo-venture-capital-zurich-headlineswhy-the-bin-laden-bounce-went-%E2%80%9Cboing%E2%80%9D/
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