Too Much Lagarde, Not Enough Tigger
This is a good time to be a long-term investor.
Christine LaGarde, the Director of the International Monetary Fund, says we have "too little economic risk-taking, and too much financial risk-taking."*
What in the world does she mean by that?
In short, she thinks companies need to make more investments. In the parlance of the academic, economic risk-taking means that big things like exchange rates, government regulation, or political stability will affect a (usually foreign) investment. Equally painful--bear with me, one more sentence, I promise. Financial risk usually refers to the chance that a company cannot meet its financial obligations, usually because it took on too much debt.
In the words of Plain Jane, I think we should consider buying more stocks.
This is one of the most scary times to make that call--and rightly so. The good news is that statistically, the losses are likely temporary, and the long-term gains are likely to win out, if we can just ride through Christine Lagarde's tough times! The saying goes that the pullbacks in the stock market are when all the money is made. Well, last week's beginning of a pullback is smaller than we've seen in years. Even if it becomes three times as bad, percentage-wise, it is still only average for an intra-year decline. We've seen this before. In fact, we've seen it so often that we might have forgotten all about it.
In the words of Plain Jane, there's nothing new under the sun.
One of my favorite charts is available from JP Morgan Chase. If you click the image, to download the entire "Little Book". Turn to page 14. Or, if downloading the image and looking at the book is just too much work, then remember 14%. Rest assured that on average, the stock market loses about 14% every year on its way to returning, on average, 10% per year.** It's like a clumsy Tigger.
And, just like Tigger, bounciness is the reason stocks historically make more money than any other investment asset class over long periods of time. Bounciness is the reason stock investors make more money than others because the others are too scared by moves like last week--and the beginning of this week--which are small compared to normal bounces.