100 Years of War & Panic

As I write these words (Monday, March 3rd), rumblings of war in a far off land (Ukraine) are sending stock prices tumbling. Our propensity to panic is on parade, again. The headlines and breaking news reports are stirring up your anxiety. What to do, what to do?

You may be thinking about reducing your stock holdings just in case all-out war breaks out in the Crimean peninsula (Crimean War II?). If you fear a conflagration that spills out into eastern Ukraine and provokes Western Europe and the United States to enter the conflict, you might even be considering selling everything and filling a vault with gold coins (World War III?).

If you are tempted to do something to protect your assets from the current climate of political uncertainty overseas, you are in good company. In fact, generations of investors have experienced the same fears and reacted by selling their stocks many times over the past century.

Let’s travel 100 years back in time. It’s 1914. The Dow Jones Industrial Average (Dow), for most of the year, trades between about 82 and 84. By July, 2014 the news from Eastern Europe sounds grim. By late July, troops were massing for battle over Serbia. U.S. stocks begin a decline that will take the value of the Dow down by more than a third by the end of 2014. As is typical, most of the fear came toward the end of the year, as the selling accelerated.

By 1915, the outcome looked uncertain, as German troops started using chemical weapons on French and British forces (soon, everyone was using them). German U-boats were wreaking havoc on global commerce, sinking military, cargo, and even passenger ships traveling between the western and eastern hemispheres.

The news continues to be bleak. A virtual stalemate was destroying European lives and economies throughout 1915 and 1916, yet the Dow rose from 53 to 99 during those two years. If you had owned the Dow at 82 in 1914 and remained invested through 1916, you enjoyed a gain of 20%, plus dividends, despite the prevailing gloom.

The United States entered World War I in 1917, and again, fear led investors to panic and sell stocks, which drove the Dow to about 66. Over those next two years, the Dow rose again to almost 120. In hindsight, it is obvious that all of the concern over a massive global war destroying the U.S. economy was misplaced. The economy grew and with it, the value of most stocks.

In addition to the growth in the value of stocks, the average dividend yield for the Dow was between 7% and 8% annually in 1914. Up until the 1990s, average dividend yields were larger than the average gains of those stocks in the Dow (a factor that those who wish paint negative stock movement stories often neglect).

This brief history lesson is meant to highlight one of our biggest investing problems; fear. Bad news scares us into behaving in totally illogical ways. Is a war starting? Are we on the brink of another Great Depression? Will inflation destroy our economy or will it be deflation

Yes, every once in a while, something bad leads to something worse leads to something unimaginably horrible. No matter how bad things have been in the past, human economies have shown remarkable resilience, even strength. 

Stocks represent the value of pieces of the economy. In aggregate, they are an excellent proxy for the value of the world’s productive resources. Since the dawn of recorded history, the economic value of humanity has grown steadily as our resilience and ingenuity have allowed us to overcome an unpredictable array of obstacles and disasters. The naysayers have always been wrong (eventually).

If you want to play the house odds, keep betting that our global economy will do what it’s done for thousands of years; grow (and do so at an exponential pace). That means that you always have a portion of your money in a portfolio of thousands of stocks from around the world. No matter how bad the news or how negative you feel, the only time you sell is to rebalance your portfolio (after enjoying gains) to maintain a comfortable level of overall volatility.