About a week ago I got asked a question by one of my younger clients that any intelligent person would ask. It went like this.
“If the economy is so screwed up … why is the share market and property prices at all-time highs?”
And then, last Friday, the stock market tanked. That Friday was not a particularly good day for me, so I did not see what the market had done until I was about to go to bed but when I reviewed my portfolio, I let out a sigh. It was one of those sighs that people who know you know the news is not good. And so, as I often do, I told my two boys that their share portfolio got a hammering. It was the largest one day hammering they had seen. This then led one of them to bullishly state that it will probably bounce back on Monday.
How wrong he was because on Monday the market fell even further. If Friday was a hammering, then Monday’s hammering was done by a jack hammer. And on Monday it scared the living daylights out of my kids. I think one of them thought that was the end of his future house deposit.
Anyway, back to the original question. And if you happen to have a share portfolio and got jackhammered, too, what should you do?
If you listen to anyone, they will all tell you the economy is ‘stuffed’. To a certain extent, it is true. Australians have found that in the last year, household incomes have dropped by more than almost any other country in the world. And we all know that pricing seems to be shifting upwards.
But when the market was going up, was it telling us something? And now that it is getting a hammering, is it telling us something else?
There could be many variables. The potential cut in interest rates? The US elections? The future of AI? Potential recessions?
Hell, if I know.
Reality is no-one really knows. I do not care how many ‘experts’ are put in front of us, I have never met anyone know was able to time the market.
This is what I do know. The share market is priced depending on what it thinks will happen to the economy in Australia and in particular what is happening in the USA and China going forward.
Here is another thing I know.
Shares mostly go up.
I always tell clients the share market is risky and that no one knows what is going to happen but based on history the share market goes up in the long term.
If you think about what the share market is, it does make sense. The share market is just a lot of businesses that inevitably make money. Some make a lot of money. Some less, but they are all mostly making money or profits.
These profits are usually reinvested into the business to make it better which leads to more profits. If that is the case more investors will want a piece of the pie, and this makes the share price rise.
But if the economy is stuffed and we constantly are hearing about businesses going bust how can businesses be making money? There are two reasons for this:
We are spenders
Australians are spenders. And they must show on social media they have it better then everybody else. And once you are in the habit of spending it’s hard to kick the habit. It’s a drug addiction like nothing else. Crack cocaine on steroids if you like.
The Australian economy is moving along because we are not prepared to cut our personal spending even when we know we should.
Immigration
There are a lot of people coming into the country. That means they spend more.
In fact, if we did not have the immigration, Australia would be in recession.
Because we are spenders and are prepared to increase our spending every year in most years the share market tends to go up. If you do not believe me look at the diagram below which is also in my book The Passport to Real Wealth and Financial Freedom.
Now it is true that the share market occasionally crashes. And despite all those experts they can never tell you exactly when that is going to happen which leads me to query how much of an expert they really are. Sometimes I think my dog could do a better job.
And so, what happened last week, and this week is effectively a crash. I think there will be more corrections over the next few weeks and months. But over time it will recover. And that is why I don’t think my son’s house deposit is lost just yet.
Many (including me), look forward to taking advantages during crashes. This is because it allows us to get into the market and buy at low prices when everyone else is panicking and getting out. If you are for the long-term buying during crashes may make sense.
If you are in for the long term, ignore crashes. They are like summer mosquitoes in Brisbane. A pain and annoying but generally harmless.
This article is general in nature and should not be seen as advice. Everyone’s circumstances are different, and you must seek professional advice relevant to your circumstances before taking any action.
Investing and creating astonishing wealth is step 7 of our 9 steps to working less, earning more and creating astonishing wealth. If you would like more information, email Hitesh at hitesh@medisuccess.com.au or call 07 3161 9548.
