Fire Drill – Global Stock Markets Collapse – Fire Drill

Large financial institutions that everyone assumed to be too big to fail are facing ruin. There is even talk of a global sovereign debt crisis that will push countries to the verge of bankruptcy. Media commentators are talking about the end of capitalism as we know it.”

Investment markets are falling around the world. Billions have been wiped off the value of companies and pension and investment funds as a result.

Now breathe!

Hopefully you noticed from the title of the post that this is a fire drill. The above text is what was being written and spoken about during the financial crisis of 2007 to 2009 during which time many large financial situations were not too big to fail and nations were pushed to the edge of bankruptcy.

As history has since shown it wasn’t the end of capitalism as we know it (but perhaps governments, law makers and the global financial markets are repeating the same mistakes?). In fact, from the lows of March 2009 global markets have enjoyed relentless growth and have reached record highs: in the UK the FTSE100 pushed passed the 1999 high point in 2015 and has since breached and stayed above the 7,000 mark. In the US the S&P500 has nearly quadrupled in size and the ACWI Index (a proxy for global markets) is up 276%.

So, if markets are steaming ahead and pension and investments funds are growing, why am I writing this note?

Because there is a lot of commentary about whether this bull market is about to end and whether investors should expect to see their portfolios fall.

I don’t know whether the stock markets will be up or down this time next week, next month or next year. Nobody does. Even those who lay claim to accurately predicting the Credit Crunch have been proven wrong with future predictions.

Indeed, evidence shows that just because a stock market is at an all-time high there is no greater probability that it will soon crash.

So maybe stock markets will fall, maybe they won’t. The most important thing to know, understand and accept is that the biggest mistake investors make is in their response to corrections. Stock market falls represent a fall in value, not a loss. Losses only occur when holdings are sold, most commonly at the bottom, just before a recovery.

As the chart below shows, global events happen, the stock markets react to a greater or lesser extent but what feels and sounds significant at the time end up being mere blips.

Stock Market History

(click to open larger image)
As I have written about previously here and here investing requires patience and discipline.

If you have gone through the financial planning process with a qualified financial planner you will have financial plans that are structured according to your unique circumstances, priorities, financial position and willingness & need to be exposed to investment risk. Going through the process ensured that any investments that you have made were done so in the understanding that you are investing for the long term, with the acceptance that there will be periods of stock market losses and in the knowledge that over the long term a diversely invested portfolio should provide the opportunity for growth.

If you haven’t been through the financial planning process and your ISA and pension portfolios are a hotch potch of holdings taken from the financial media you may wish to engage with a highly qualified and independent financial planner.

I hope the start of this note didn’t cause too much alarm. The purpose was simply to provide a reminder that as and when markets fall, whenever that may be, there is no need to panic. And, in the case of this fire drill you don’t need to head for the exits!


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