Capitalizing on volatility, staying the asset building course through economic ups and downs

1000-point stock market gyrations, national credit rating downgrades, international financial uncertainty, continuing political gridlock, what a fabulous time to start building assets!  

Statements such as above generally result in my colleagues backing away slowly, avoiding eye contact as they scout the shortest distance to an exit.

Building assets now? When things are so uncertain and volatile? We always knew he was a bit off!

The truth is, I have no idea what the stock and debt market is going to do tomorrow, and furthermore, I really don't care. The primary principle behind asset building or any reasonable wealth building program should be a long-term, patient, steady investing of one’s thought, knowledge and capital. Therefore, what happens in 24 hours, days or even weeks should be irrelevant to someone interested in building wealth over a lifetime. That said, when one's retirement is only a few years away, it is likely best to have a more conservative savings strategy with limited stock market exposure.

One often-neglected attribute for successful long-term financial success is the avoidance of emotional response to daily hyperbole around the economy, markets or political process. Of course, like most things that are worth doing, this is easier said than done. Entire industries (we’re talking to you 24-hour news networks) have an investment in the drama of sounding the alarm around pending economic calamities to drive viewership.

Just how silly does it get? Well, immediately following last month’s U.S. debt downgrade, a breathless earnest CBS radio newscaster told America, “a lot of investors are taking their money out of stocks and putting their money into U.S. Treasuries, which some see as safer.” Huh? So, S&P’s downgrade of Treasuries has stock market investors fleeing into... Treasuries for safety. Now that S&P, the same people who by the way thought the mortgage market deserved a triple A rating, has officially decided treasury bonds are not completely safe, investors are flocking to that security?

It gets even sillier.

While pundits of all political stripes and economic forecasters from every cable channel have their own panicky pontification on the downgrade, it is worth noting that only one commentator actually provided any historical analysis following the event. As reported by Paul Krugman in the New York Times, “Those rare cases where rating agencies have downgraded countries that, like America now, still had the confidence of investors, they have consistently been wrong. Consider, in particular, the case of Japan, which S&P downgraded back in 2002. Well, nine years later Japan is still able to borrow freely and cheaply. As of a few weeks ago, in fact, the interest rate on Japanese 10-year bonds was just 1 percent.”

Ah, but the U.S. is different, isn’t it? We are certainly not Japan, but actually, the precise same thing has happened here, but, notably, the media paid little attention. The Treasury auction immediately following the S&P downgrade yielded the lowest cost of interest for the 10 year T-bill in the history of the country! That's right, framed another way, after the downgrade, we, and I do mean you and me, have borrowed money with a ten year bond at the cheapest rate ever! Funny, how that little piece of historically significant information was just buried by the talking heads. Entombed even further was the fact that in the last quarter, 77% of companies reporting earnings exceeded financial expectations.

Despite historically low interest rates and corporate America’s coffers fat with cash, we still see absolutely remarkable volatility in both markets and consumer sentiment. The week following the U.S. downgrade, several small biotech companies witnessed their stock price and resulting corporate valuation literally get cut in half-- this despite no change in the company’s sales, profits or gross margins. 

What we have been seeing is nothing more than an emotional response to uncertainty. Markets and the people which make up markets simply can't process uncertainty, and rather than doing nothing, people choose to act. Unfortunately, acting during periods of extreme volatility can be remarkably costly, usually taking the form of selling just as everyone else is reacting to the same instinct.

This kind of herd mentality was particularly evidenced in 2008. According to some, the end of the world was nigh, and far more people wanted out of the market than would stay the course.  This ostensibly meant panic selling into a down market and locking in losses. Of course once people locked in these losses, they did not have the confidence or capital to profit from the following two years of above average market returns. These investors were whipsawed, a particularly vivid term reserved for those who get into markets when things seem rosy and panic sell out of a market when things seem bleak. Perhaps, the worst part of such and experience results when the individual, once burned, determines to no longer engage in savings and investing, leaving behind the opportunity to plan and build a better economic future.

Again, asset building at its core depends on a long-term commitment. Investors who simply stayed the course in 2008 were well rewarded, earning back there losses within the next 2 years, and if they were committed enough to there asset building plan actually accumulated additional shares at discounted prices all throughout 2009 and 2010.

The legendary investor Warren Buffet describes volatility as an opportunity for contrarian minded individuals, rather than a crisis: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." He encourages like-minded investors to "look at market fluctuations as your friend rather than your enemy; choose to profit from folly rather than participate in it."

For example, given the above mentioned biotech volatility, when one believes in any business or company at $10 per share, then a halving of the stock price due to investor panic only results in the opportunity to purchase additional shares at a great price. Given how quickly markets can sometimes move, buying during these dramatic pullbacks can and often does provide a nearly immediate increase in one's bottom line.

Times of economic uncertainty actually provide an excellent opportunity to add to one's savings while basically acquiring the asset as if it is on sale. This practice is referred to as dollar cost averaging, whereby investing the same dollar amount each and every month, one buys more of an asset when it is cheap and subsequently less when it costs more. Such a regular investing strategy has been shown to outperform other investing styles over the long term.

Market volatility is a natural part of a capitalist system, but it is up to the individual to determine how they will respond to such news. One can decide to develop a long-term prudent financial strategy, focused around a regular investment and savings program, with a responsible home-ownership component. Such a plan will have its ups and downs, assets will both increase and decrease over time, but over the long haul, such a strategy has always outperformed trying to time the market.

Building a financial future is a commitment. It’s not easy to put the pieces together, find the dollars every single month to fund the investment, and now, more than ever, tap the internal fortitude to stick with the plan as others scream the sky is falling.

It’s not the end of the world; ultimately, the sun will come out tomorrow, and the day after that, and the day after that! There is still an unlimited future, energy independence, curing disease, rebuilding America’s infrastructure, stem cell research, the continuing Internet revolution and countless other opportunities to make the planet a better place. The future is limitless with opportunity and favors those who prudently, intelligently faithfully plan.

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Thomas Foley is the Deputy Director of the World Institute on Disability and rejects the financial consensus narrative by not doing the things no one has ever thought of not doing!