5 reasons to ignore the market doomsayers

Whenever stock markets get more volatile, like they have in the past few months, the doomsayers always come out. These prophets of doom and gloom go on and on about how derivatives are going to cause another financial crisis, or how valuations are stretched, or how equities are going to collapse, or how tariffs are going to wreck the economy, or how the United States is going to default on their debt, and so on.

Individual investors read the commentary by these experts and wonder if they should adjust their portfolios, or even sell everything and wait out the collapse.

We at 5i Research are here, though, to calm the waters. In every single one of our 40 years in the business, someone, somewhere, has predicted a calamity. Sometimes these prophets get it right, even if only by sheer coincidence. If you are predicting a market collapse or correction for years on end, of course every once in a while you are going to be right. Are we worried about a recession right now? Yes we are. But there is a giant difference between a recession and a market crash. Recessions are short, and — usually — mild. A crash is a whole other thing.

Let’s look at five reasons why you should ignore the really dire market predictions, and those who make them. Take a deep breath, and continue to invest (for the long term).

Most doomsayers have something to sell

Nothing grabs headlines faster than some “expert” predicting a 50 per cent market collapse. The media hops on board, fuelling the fans of panic. Keep in mind, though, that almost every prophet out there has something to sell, be it a book, research, a newsletter, a website or alternative investments to protect against a crash. They love the publicity which can drive sales. Some are experts at using the media to highlight their dire predictions. Many authors love the publicity a doom and gloom prediction gets. Who wouldn’t want to buy a book telling you how to protect your investments against a crash?

All doomsayers, so far, have been wrong

In my 40 years in the business I have seen numerous market crashes, financial crises, dot-com implosions, Asian contagions, wars, inflation and accounting scandals. Yet here we still are, with markets down a bit, but not that long ago all-time highs were realized. Dividends continue to be paid. Companies continue to be acquired. The S&P 500 index is up 330 per cent since 2008 (according to Bloomberg LP), which was the closest thing to a “real” collapse the world has ever seen. Every prophet has been wrong, at least in the long term.

Time works against you

Suppose you do think a crash is coming after listening to a bunch of bearish “experts.” You move to cash or buy those highly leverage investments, such as the three-times inverse market exchange-traded funds (ETFs) that dealers would love to sell you. Now it is just a matter of time before you make out like a bandit while everyone else’s portfolio goes down 80 per cent — the fools. Yet every day you wait you lose interest. You lose dividends. You lose reinvested capital. Those ETFs you bought suck out high fees daily and their resetting derivatives destroy your asset value. Think about those investors and experts who have been bearish for years, and there are plenty of them out there. If you have been fully invested, your portfolio could probably take a 50 per cent hit today and you would still be well ahead of the bearish group. Time has a way of making bearish investors much poorer.

If you really knew, why would you tell anyone?

Let’s think about this. If you really knew there was going to be a market collapse, could you not make billions with the right investment strategy, using highly leveraged securities, to bet against the market? Would this strategy not dissipate the more you told people about it? Would it make sense to sell a newsletter for a couple of hundred bucks if you could make billions actually following your own (if accurate) predictions?

Rules can be changed at will

This is perhaps the biggest reason not to follow the doomsayers. In 2008-2009, in response to the financial crisis, governments worldwide banned short selling, bought toxic securities from banks, lowered interest rates and flooded the system with money in order to stem off the crisis. Many short sellers, who perhaps should have made a killing during this period, didn’t fare as well as they should have because of government intervention at the time. We have used this analogy before: It is like playing poker against someone who has unlimited resources who is allowed to change the rules whenever it suits them. Why would you play at all against such an opponent?

So, despite the craziness of the market, take a deep breath and ignore the doomsayers. Regardless of the benefits to your portfolio by ignoring them, no one likes a Debbie Downer at their party anyway.