Eight years on…and there’s no end in sight.
By now, the world’s economies should have recovered.
That’s why governments and central banks spent hundreds of billions (trillions, even) to bail out banks and stimulate the economy.
But for what? It hasn’t worked.
Last Tuesday, the Reserve Bank of Australia (RBA) cut its benchmark Cash Rate to 1.5%.
On Thursday, the Bank of England cut its main interest rate to 0.25%.
Both are new record lows.
What on Earth does this mean now? And, most of all, what should a regular investor like you do about it?
In fact, should you even do anything about it? Maybe it’s just best to do nothing. Many investors are wondering this now. Rightly so. Here’s our take…
How did the markets respond? Immediately after, the FTSE 100 soared nearly 100 points — 1.46%.
That makes the decision easy. Buy stocks.
Not so fast. Last Tuesday, when the RBA cut interest rates, Aussie stocks fell by 1.5%.
It’s plain to see an interest rate cut these days ain’t what it used to be.
The markets are confused, and so are investors.
Some things just don’t make sense
The current market is an example of why most investors fail.
In short, most investors try to make sense of things that just don’t make sense.
We’re not saying you should ignore all the ups and downs with interest rates and stock prices. We’re saying that you should avoid reacting to every single event.
If you try to buy or sell a stock to take advantage of a news driven story, there’s a good chance you’ll get the timing terribly wrong.
Because by the time something hits the news, most of the action is already in the stock price.
That’s why it’s better to play this market differently. Instead of being reactive to news events, you should be proactive, or completely inactive.
The first probably makes sense. Plenty of folks say that it’s better to be a proactive investor. Don’t wait for things to happen and then act. Instead, make an assumption about what could happen, act, and then wait until you’re proven right (or wrong).
As a proactive investor, there’s something thrilling about making a prediction and then watching events play out as predicted.
Of course, being a proactive investor has a flipside. It means there’s a reasonable chance that your prediction won’t play out as you expect. When that happens, there’s something gut wrenching about watching a stock grind the wrong way as your losses mount.
That’s why being an inactive investor during such times, has an appeal.
Be clear, we’re not talking about passive investing. We don’t subscribe to the idea that you should invest your money in an asset and then forget about it.
History shows that markets go through all manner of phases, companies come and go, and different assets perform better at different times.
To our mind, simply buying and then holding an asset, and then not re-evaluating your investment over time, just doesn’t make sense.
However, there are times when it does make sense to be completely inactive, and do nothing.
But that’s only when you have a comprehensive investment plan in place.
Over the past eight years, we’ve had broadly the same investment plan. We’ve allocated a different percentage of our portfolio to different asset classes: cash, gold, stocks, and fixed interest.
At times we’ve added to one of these asset classes, and at other times we’ve added to another.
We keep tabs on our investments regularly. That, we believe, makes us an active investor. But, despite our ‘active’ investment approach, the actual actions we’ve taken in our portfolio are few and far between.
We rarely sell anything. Instead, we mostly buy as new cash flow becomes available, allocating cash to various asset classes when they appear to be good value.
Most of all, we resist the temptation to react or overreact, especially on the back of event-driven news.
As central banks have cut interest rates, or promised to raise interest rates, we’ve remained inactive…not doing anything. Even if the price of an asset falls to a level we think is attractive, we’re more likely to do nothing than do something we may later regret.
This type of investing takes discipline. It’s hard to do nothing when a soaring or crashing market makes you feel as though you should do something — anything.
But we recommend trying it. Don’t let the market or other investors force you into reacting. Let them panic. Let them be the ones to regret their reaction.
While they’re doing that, you can continue to survey the market calmly. Then act on your own terms when you’re ready to do something, and not before.
For The Daily Reckoning
Editor’s Note: This article was originally published in Money Morning.