Global Crises and the Stock Market

Global Crises and the Stock Market Nearly four years have passed since the devastating 9/11 attacks on the United States, and it appears that time and perspective may have helped investors learn difficult lessons about staying calm amid the uncertainty that terror generates. On July 7, when a string of bombings hit the London public transportation system, U.S. markets opened down but spent the rest of the day recovering, as major U.S. stock indexes finished the day on an upward trend. Overseas, major European markets were initially down but also had recovered by the next day's end. Moreover, the terror threat that continues to hover over London has had little to no adverse affect on the U.S. markets.

A Historical Perspective
There's no doubt that world crises of the magnitude of the September 11 attacks put significant stress on the global economy, financial markets and international political stability. While past performance is no guarantee for the future, consider these historic stock market comebacks:

Pearl Harbor. In the five months following the attack on Pearl Harbor which ushered in the United States involvement in World War II the S&P 500 declined almost 16%. However, by the time the war ended in 1945, the index had advanced 63% from its level on December 7, 1941.

Korean War. On June 26, 1950, the day after North Korea invaded South Korea, the S&P 500 fell 5.38%. When the Korean War ended in July of 1953, the index was almost 30% above its level the day of the invasion.

Iraq War. Considering a more recent example, from March 19, 2003 " the day the United States and its allies launched a military campaign against Iraq " until March 31, 2003, the S&P 500 fell 2.96%. One year after the initial invasion, the S&P 500 was 24.88% higher than it was on March 18, 2003.

[Historical market data is based on daily price returns, excluding reinvestment of dividends, for the S&P 500. Past performance is no guarantee for future results. Indexes are unmanaged and cannot be invested into directly.]

Coping With Uncertainty
Dealing with crises requires more than just a historical perspective. You should also consider these suggestions:

Practice buy-and-hold investing. The only certainty about the stock market is this: It will always experience ups and downs. That's why it's important to keep emotions in check and stay focused on your financial goals. A buy-and-hold strategy " making an investment and then holding on to it despite short-term market moves " can help. The opposite of buy-and-hold investing is market timing buying and selling investments based on what you think the market will do next. Market timing, as most investment professionals will tell you, is risky. If your predictions are wrong, you could invest when the market is on its way down or sell when it's on its way up. In other words, you risk locking in a loss or missing the market's best days.

Talk with your financial advisor before you act. He or she can help you separate emotionally driven decisions from those based on your goals, time horizon and risk tolerance. Researchers in the field of behavioral finance have found that emotions often lead investors to read too much into recent events even though those events may not reflect long-term realities. With the aid of your financial advisor, you can sort through these distinctions, and you'll likely find that if your investment strategy made sense before the crisis, it will still make sense afterward.

As experienced market watchers will tell you, time may just be an investor's greatest ally. Use it to your advantage by sticking to your plan and focusing on the future.