The countdown to the federal debt ceiling limit and surrounding rhetoric regarding a possible default by the US Government has caused many investors to wonder if they should get out of the market. Then again, it may be the possibility of Iran getting nuclear weapons, hyper-inflation due to excessive government borrowing, persistent high unemployment, the wildfires in Arizona or the fact that it has been some time since Tiger Woods won a major golf tournament. Whatever the crisis du jour may be, doesn’t it make sense to take some of my money and hide until the crisis passes?
I could take the position that no one ever knows what’s going to happen with the economy or how the markets are going to react. Which is true. The more important point is that it is completely unnecessary even to try to guess. Over time, the stock market has increased in value. It is the only asset that becomes more valuable without relying on supply and demand. The stock market is composed of thousands of companies looking for ways to improve. When a company increases profits, the value of its stock eventually increases too.
Whether the economy inflates or deflates, gets hit with a natural disaster or a man-made one, companies will figure out a way to make money. Not all of them will, which is why it is important to diversify. However, enough companies will survive to carry the market higher eventually. History has clearly shown this. We have been through wars and depressions and many financial panics. Each time the market recovered and went on to become more valuable.
The risk is not that you will be in the market for the next 10–20% downturn. The risk is in missing the next 50–100% advance. Ask anyone who sold out in 2008 after the Lehman Brothers bankruptcy and is still sitting in cash. They may have missed the last 10-20% drop in the Dow Jones Industrial Average. They also missed the 90% move back up to 12,000.
Sit back and enjoy the ride. You can’t predict the short term moves in the market anyway.