How much attention should we pay to prophecies of financial doom?
Whenever you write an article in looking at where shares go next, somebody will invariably post a comment saying the entire global economy is based on a myth, markets are about to collapse, society is doomed, and this time next week we'll all be shivering in caves and eating each other to stay warm.
Motley Fool user theRealGrinch was at it last week under my article Why I'm Hoping For Further Market Falls, claiming that "I really believe we are heading for 4,400 or worse before Easter 2010". He belongs to an honourable breed, his doomsday scenario was relatively modest as they go, and of course he might well be right.
So should we do something about it?
Blood and guts
The voices of impending doom are always with us, but the credit crunch has brought them out in force, like sharks sniffing blood at a feeding frenzy. And as I have always been fascinated by sharks (who isn't?), I have to admit that I don't relish staring into the jaws of impending financial horror.
My favourite journalist of the crunch has been Ambrose Evans-Pritchard at the Telegraph, who has tossed his hungry readers endless hunks of economic blood and chump, including meltdown in Latvia, a collapse in global trade (Beware the Baltic Dry Index!), Credit Crunch II, eurozone meltdown, Chinese meltdown, Japanese meltdown…
I've lapped it all up, even though none of these horrors have yet to come about, and if they did, we would all be shivering in caves wondering which of our friends had most meat on them.
Gloomy Toons
It takes a fair bit of nerve to keep your head while all about you are screaming "Fire! Fire! Fire!", but try and keep yours.
At the start of this year plenty of people were claiming that the FTSE 100 would fall below 3,000 and equities were fried for a generation. Anybody who tossed their portfolio out of the window to escape the flames will have regretted their decision after the smoke cleared in March, our economic foundations were charred but still standing, and the benchmark rallied to 5,000.
That is one of the dangers of doom-mongers. If they're wrong, they're very, very wrong, and woe betide those who paid too much attention to their ravings.
We're all doomed!
Yet their claims exert a grim fascination. Like all soothsayers, they pretend to a secret knowledge that has evaded the rest of us Foolish mortals. It's Biblical, the End of Days. It's hardwired into our psyche. That is why every so often, some cult assembles on a hillside and waits for the world to end.
The fact that it doesn't end rarely deters them, and nor does calling them Cassandras, because as they will quickly point out, Cassandra was right (but doomed not to be believed).
And if they are correct, we will all be shivering in caves etc etc, and serve us right for not listening to them.
Armageddon outta here!
With the FTSE dipping to 4,999 as I type, this is a dangerous time to write these words. TheRealGrinch may be right and the FTSE could hit 4,400 long before Easter. Ambrose Evans-Pritchard may be spot on with one (or all) of his predictions, and countries will topple like dominoes.
The only problem is that if you believe them, the only logical response is to ditch your entire portfolio, short anything that moves, buy gold and dig a bunker in your backyard.
None of which I'm actually doing, what about you?
Duck, everybody!
Although doom-mongers attract people's attention, few people act on their warnings. Because if you think the world is about to end, you have to take some pretty serious evasive action, and most of us aren't willing to do that.
And it is when you take action that the doubts start creeping in. What if the FTSE 100 doesn't actually collapse? If I sell up, and it subsequently rises to 5,500, I will feel pretty silly, and will have lost a lot of money to boot. And what if I put all my money into gold, and the price collapses? Or my bunker collapses?
Doomy prophecies make intoxicating reading, but I'm not sure they're a great guide to what you should do with your portfolio. You should take a much more measured approach to The Coming Rout in Shares.
Revenge of the Grinch
The doom-mongers do perform a useful function. They alert us to the many dangers facing the global economy, stock markets and our own portfolios. They help prevent us from getting carried away by short-term rallies. And they add another piece to the jigsaw puzzle of company, market and economic sentiment that guide our investment decisions. We should thank them.
On a wider scale, they also alert policymakers to the imbalances in the global economy, and hopefully encourage them to do something about them. So you shouldn't ignore them, but you do need to keep them in perspective.
Stock markets have trampled over a mountain of gloomy prophecies to hit their current levels. I agree that It's Time To Be Defensive Again, but I wouldn't go to extremes.
Because if the world does fall about our ears and we all end up shivering in caves and inviting our friends over for dinner (then eating them), we will have a lot more to worry about than whether our favourite company will cut its dividend next year.
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