It’s fairly easy to look around the world and recognize places where uncertainty reigns. Not wars or disasters, but political uncertainty, the kind that depresses investors.
Run away? Not really. Investing when news is bad can be a great strategy. Take Brazil, for instance. Its main stock market index is up 66% so far this year.
That’s much better than the S&P 500, up just a bit more than 8% so far this year.
Despite the largely positive glow of the Rio Summer Olympics, Brazil has real problems. They just ousted an elected president, albeit peacefully. Huge numbers of ordinary Brazilians feel they’ve been left behind as the country’s elite have prospered.
Brazil is a big oil driller, and the price of oil has tanked globally. The list goes on.
Yet here we are, watching their stocks zoom higher. So why doesn’t everyone just buy Brazilian stocks and let it go? Because the performance this year follows a whopping 41% decline last year.
How many long-term investors could take that kind of emotional ride year after year? Not many. Even if you diversify and buy a Brazilian stock index fund, there’s no guarantee that next year won’t be another cliff dive into oblivion.
Investing in stocks means you have to be able to handle the swings that can occur. Most American investors remember perfectly well the dread they felt in 2008 when the U.S. stock market crumbled to bits.
We’re back and setting new highs, but the climb out of that hole has been long and stressful.
The dilemma of investing remains the same, whether you’re talking foreign or domestic stocks. Most of the growth in your portfolio is going to come from stocks. The long-term data proves it.
Yet most of the volatility in your investments is going to come from stocks, too. When stock prices move up sharply, we rejoice. But then we brace for the downdraft that can follow.
Where investors get into trouble is market timing, attempting investing when news is bad and then getting out when news is good.
Zigging when they zag sounds great, the ultimate money-making strategy. And it can work from time to time. More often than not, though, investors pay a big price for trying.
What’s the solution? Portfolio investing instead. Yes, buy Brazil, and Russia and China, too, but remember that the volatility of those places will be a challenge. Accept only as much of that risk as you can stand.
By maintaining a diversified portfolio, you can soften the emotional blows. But there’s another advantage, too.
Sticking to your portfolio will help you do more investing when news is bad. Rebalancing allows you to load up on stocks as they fall in price and sell off those gains when recoveries occur.
Nobody can predict what will happen next, nor should they even try. The cost of being wrong is far too high. Yet you can participate in those good times just by following a simple, well-conceived plan.