Warnings about the potential fallout from defaulting American mortgage borrowers have been around now for quite awhile, but when would these pigeons come home to roost and what size effect would they have?
Well now we know I suppose.
But as some traders forecast ongoing market turmoil, what's the real story? Perhaps some context would be sensible here.
Firstly, the stock market hasn't yet fallen that far. Headlines of course will shout that the FTSE 100 index dropped by over ?60bn in one day. But this is against an overall FTSE worth of ?1.5 trillion, and so now does not sound so bad.
Its important to remember that the 'Footsie' had plunged to 3500 in February 2003, so a stockmarket level of just over 6000 still represents a 70% plus recovery over four and a half years. When you then look further back, the main market indicator is still four times higher than after the 1987 "crash ". Dividends are excluded here - which would add to the story.
Also, even though certain strains are starting to show, UK Plc appears to be in a sound condition. So even though European banks have been affected, it is primarily an American problem.
It would also be true to say that this episode does show what globalization is all about. This US housing market panic may show itself anywhere in the world making banks and investors nervous.
We must always remember that not all banks are rock solid. If the bank's asset base including loans starts to go bad, confidence will drain away. This means that the bank has to pay higher money market rates to fund itself.
Nerves recently led the European Central Bank to pump a large amount of temporary cash into the system. This was to stop interbank rates rising massively.
So, is the panic over for now and what's likely to happen next?
You will quite often find that in these times of doom and gloom, there will be a short term bounce in share prices. Investors are out there looking for "bargains", and it is not unusual to see a lot more volatility.
The important thing to remember is that these crises are often short term blips. But of course it may well prove more serious than this.
However, let's remind ourselves of one of the basics of long term investing. DON'T PANIC!
Stockmarket investing should not be about the short term. If you want to gamble, go to a casino or racetrack. You may win, you are most likely to lose. But long term investors have historically enjoyed very good returns, and unless we are entering a new paradigm, they will continue to do so.
The Financial Tips Bottom Line:
If you have a risk assessed portfolio with the right asset allocation for you, there is no reason to panic.
If, however, you are unsure as to the relevance of your invesments to your goals in life, check this out now to make sure you are making informed decisions and not taking more risk than you need to.
ACTION POINT
Review matters now if you are at all concerned. If you use an adviser, ask what your asset allocation is. How does this mix of assets help you achieve your goals? Do you have the right mix of equities to bonds and property etc? Has your adviser built you your own financial forecast?
