The Dow Jones fell the largest amount in history on trading on Monday, and stock markets across Europe slumped too. Not wanting to be left behind, the Australian stock market joined the bloodbath on Tuesday with a frenzy of selling that drove the value of the market down over three per cent.
This is like a cyclone arriving on a calm sunny day. Stock markets have been extremely quiet and well behaved for a couple of years now. The slow grind upwards has been almost never interrupted by falls — let alone by record-setting ones.
It has investors worried. Has something important changed?
This is where Australians have to perk up and pay attention. The biggest trend of recent years has been asset prices rising in synch. Bonds went up. US stocks went up. The average Australian house went up and so did cryptocurrencies.
The market for bonds is the biggest in the world — more even than all the share markets put together. We don’t pay much attention to it because it is not really for everyday investors. Bonds tend to be bought and sold by massive investors like superannuation funds.
What that means is that when the market for bonds started turning south about four months ago, it didn’t make big news. If you didn’t notice the biggest investment market in the world falling, then the falls in prices of Aussie houses and stocks (and Bitcoin) seem more isolated.
But once you pay attention to the falling price of bonds, you see a pattern. An “everything bubble” that grew large is potentially coming apart.
If it does, the safest thing to do with your money is take it out of investments with the highest potential to fall.
MAKING STRATEGY FOR YOUR STRATEGY
Before you go digging a nuclear bunker and filling it with gold bars, think about the strategies that win over the long term.
Investment advisers love the following saying: “Time in the market beats timing the market.” It is easy to pull your money out at the exact wrong moment, and instead of missing out on a big fall in the market, you miss out on a big appreciation.
The falls in housing and stocks resemble a signal that things are about to zoom straight through mild upset into full catastrophe. But in a week or so, it could all look very different. We might go back to meek, mild markets that patiently clamber ever upward. You never know — and personal fear is a weak guide to what global markets might do next.
The other saying is: “Be fearful when people are greedy and greedy when people are fearful.” That would have been a billion dollar strategy for trading bitcoin. The cryptocurrency has now fallen from over $20,000 to as low as $6500 in less than two months. Spruikers claiming it would go to the moon and make everyone rich were a very good sell signal.
So today’s fears could be useful to you. You might use this dip as a way to get your toe into the housing or stock markets while you can and hope things recover. Aussie stocks fell 3 per cent on Tuesday morning. If in a year, stocks go back to where they were on Monday afternoon you’ve got a 3 per cent return — that’s better than most Aussie banks will pay in interest on a deposit.
If you do want to reduce your chances of being exposed to a widespread crash, the trick is to get into safe assets and assets that tend to go up in bad times.
One very safe asset is cash. (Not literal cash that be stolen from your house — we are talking bank deposits here.) The Aussie government guarantees money you put in a bank up to $250,000, so even if we get a massive bank-crushing disaster, your money is safe. If you have more than $250,000 you need to spread it over a few banks to get the guarantee.
Banks pay interest on deposits, which isn’t much, but beats losing money. You can get 2.8 per cent interest on an ING direct savings account if you jump through a few hoops. It looks like a terrible return if the market goes up 10 per cent, but if the market falls 10 per cent you feel like a genius being in cash instead.
There’s also gold. You don’t need a safe these days to own it — you can buy something called an exchanged traded fund (ETF) that mimics the price of gold, or just buys shares in a gold mining company. Gold is the world’s go-to asset in the bad times and it is unsurprisingly rising right now.
Selling housing is a much harder decision than moving liquid assets around. If you own a bunch of investment properties, you can’t simply flip them with a few clicks of the mouse. In most of Australia, housing has been a safe haven asset that has outperformed the stock market in recent years (not in WA, of course, but on average). But it is not immune from a fall.
Unlike stocks, property hasn’t seen a big correction for a long time, and a glut of apartments coming onto the market raises risks. Telling the future in this market is especially hard, and trading real property is expensive. By far the hardest investment decision a person can make is whether to try to sell up real estate.
Lastly, the obvious thing to do is to find a financial planner. None of this is financial advice. Good luck.