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A Few Things to Remember When You See a Scary Macro Headline

By Dylan Lewis - Jan 14, 2016 at 5:45PM

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Don't panic when it appears nothing is beautiful and everything hurts.

No more than 15 minutes after getting to work on Wednesday, fellow bureau chief Michael Douglass sent me an article from The Guardian with the headline:

"Sell everything ahead of stock market crash, say RBS economists"

I read it, meerkated over the monitor at my standing desk to make eye contact with him, and we both shrugged. Minutes later, we were on to chatting about the day's editorial work.

If you caught wind of the press covering the RBS report, or actually read the research note itself, you might be surprised that two Fools didn't have much to say about it... it projected a pretty ugly picture for 2016.

  • Oil could drop to $20, or even $10 per barrel! Shrug.
  • Central banks' easy-money policies are ending, removing the crutch that artificially propped up several of the world's big economies! Shrug.
  • Equities are down 7% so far in 2016 and RBS says they could fall as much as 20% by year's end! Shrug.

Don't confuse our nonchalance for ego -- the folks in Royal Bank of Scotland's macroeconomic research team know way more about the global markets than we do, probably more than anyone here at the Fool does. Everything laid out in the RBS research note fit well into the few principles I've managed to remember from my college econ courses.

The reason I shrug is because I know enough to know what I don't know.

  • Where will commodity prices be in a year? I don't know.
  • Will central banks continue raising interest rates and pull back on stimulus measures? I don't know.
  • Where will the market be in a year? I don't know.

One of the few things I do know is that headlines like this one tend to scare investors, and scared investors tend to sell out of fear.

So far, 2016 has been anything but kind to investors, but any time you see a headline like the one above, keep a few things in mind.

  • Volatility happens, weird macro things happen -- Since 1928, the S&P 500 has lost 20% or more in six years -- 1930, 1931, 1937, 1974, 2002, and 2008. Aside from the early Great Depression years, in the year following each 20% drop, the market has roared back with 25%-plus returns.
  • Timing the market is extremely difficult -- The chart below is probably the best argument against trying to time the market. Missing just the 10 best market days between 1995 and 2014 would cause an individual investing in the S&P 500 to have their returns to drop from 9.85% to 6.10%. Missing the 40 best days actually takes their returns negative. Remember I mentioned volatility earlier? Six of the 10 best days were within two weeks of the 10 worst days. Just saying.

Data source: JP Morgan "Guide to Retirement"

  • Your dollar-cost-average -- I could drop the fearful/greedy Buffett quote here, but I won't. Chances are you bought some high-growth companies at lofty valuations at some point over the past six months. Market pull-backs are the perfect time to add to those positions and bring down your dollar-cost-average. This piece by The Motley Fool's Morgan Housel does a wonderful job illustrating just how beneficial consistent, scheduled buying can be, even in the face of market uncertainty.
  • (INSERT HUGE MACRO THING) probably doesn't invalidate your investing theses -- Sure, (if they actually happen) contractionary periods are often characterized by short-term reductions in consumer spending and less aggressive company growth initiatives. But the healthcare company that has a flagship drug with an addressable market of tens of millions won't have that patient population halved overnight. Similarly, the semiconductor company helping power smart objects isn't going see the Internet of Things disappear just because the market has a down year. It's called buy-and-hold investing for a reason; there will be hiccups along the way, but it's a long game. That's why we opt to become part-owners of quality businesses and not traders.

I'll confess: It isn't always easy to maintain this mind-set, but chatting with folks here at Fool HQ and reading the boards helps me see forecasts, and the press that follows them, for the market noise it is.

One of the other few things I know is that this won't be the last anxiety-inducing headline announcing a major market pullback. There will be more this week, there will be thousands in the next decade. And when I see them, I'll shrug, say, "I don't know," and go back to work. I hope you do the same.

Dylan Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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