Financial Newsletter Issue September 2008

September 2008 - Issue 81 Previous Issues

The Global Investor is a monthly newsletter that covers global investment opportunities and insurance for the expatriate community. This monthly newsletter's goal is to inform the reader of what can and cannot be done in the investment arena when living and working in a foreign country. Whether it's personal pension plans or disability insurance to protect your income - Global Investments has the expertise to handle all the expatriate investors' needs.

Don't panic

Helping your clients understand market uncertainty

Stock market uncertainty creates lots of worry for investors. Falls in share prices can wipe millions of dollars off the value of equities overnight. This is why we often see huge outflows of assets from retail funds as investors panic and pull their money out en masse in an attempt to cut their losses.

However, history has shown that the most successful investors are those that stick with their decisions for the long term. They do not get caught up in the hype and short term noise in the market but instead look for opportunities during downturns.

To illustrate the possible effect of short term panic, let's look at the fate of two hypothetical investors: Mr Panic and Mr Calm.

The story of Mr Panic and Mr Calm

Mr Panic and Mr Calm both have USD10,000 invested in the S&P 500. It is 1987 and the markets are performing very well. Suddenly, on Monday 19 October 1987, markets across the world suffer a major crash. The Black Monday decline was the largest one-day percentage decline in stock market history. During October 1987 the S&P 500 fell by 21.5%*.

As a result of this crash, Mr Panic and Mr Calm's investments are now worth USD7,850.

Mr Panic panics; he wants to cut his losses and pulls out all his money. By doing so he 'locks in' this fall in value and loses 21.5% of his investment, leaving him with USD7,850.

However he is not totally put off and keeps an eye on the stock markets and early in 1989, when he sees the S&P 500 start to regain its value, he reinvests his money.

In contrast, Mr Calm, although unnerved by the crash, leaves his money where it is.

By the end of 1987, despite the crash, the S&P 500 records a total return of 105.2%. It then takes just over a year for the S&P to return to its pre-Black Monday levels. And on the 20th anniversary of Black Monday it had returned over 700%.

Let's look at what happens to these two investors over the long term.

	Mr Panic	Mr Calm
Original investment in S&P 500	USD10,000	USD10,000
After Black Monday market falls by 21.5% during October	Redeems his investment and takes his money 'as cash'. Cash value USD7,850 Total investment value USD0	Leaves his original investment alone Total investment value USD7,850
In April 1989 S&P reaches pre Black Monday levels	Reinvests his money Total investment value USD7,850	Investment has now grown in value Original investment value USD10,000 Total investment value USD10,000
On 20th anniversary of Black Monday - October 2007 S&P 500 has returned 731.7% since April 1989	Total investment value USD65,288	Total investment value USD83,170
Mr Panic has lost out on investment gains of USD17,882 by taking his money away from the market. In addition, if either of them decided to take advantage of the cheap prices of equities after Black Monday and invested an extra USD1,000 during October 1987, that USD1,000 would now be worth approximately USD8,337. Of course this is a simplified and hypothetical example and does not attempt to explain all possible stock market scenarios or take into account fees or expenses. Investing in the stock market carries risk and investors may not get back their original investment.

Time in the markets not timing the markets

In theory the perfect investment strategy would be to leave the markets when prices are high and re-invest when prices are low. But in practice this strategy seldom works as market falls and rises are notoriously difficult to predict.

Many experts agree that if you are investing for the long term it is 'time in the market, not timing the markets' that can deliver superior returns. While there are no guarantees, investors are better off staying calm, resisting the temptation to leave the markets and to sit out the fluctuations. Indeed, some investors may even see downfalls as buying opportunities.

*All data taken from Standard and Poors. Data gross of fees and calculated on a bid-bid basis in US dollars.

Please contact Global Investments for more information
Tel. (+66-2) 662-2009 or e-mail at info@globalinvestments.net.