Investors are constantly exposed to noise from the market that can distract us from our long-term objectives. Take these two conflicting headlines as a perfect example:
'5 Big Investors Plan For A Bear Market' – Investopedia; and
'The oldest stock market indicator known to man is flashing a big buy sign' – Business Insider
The first article notes that "five famed investors see a bear market around the corner, and recently gave their views on how the downturn will begin and how low it might go."
The other began by saying: "Reports on the imminent demise of the eight-year equity bull market have been greatly exaggerated, at least according to a century-old indicator."
The message portrayed by either article couldn't be more different, yet many investors will find it difficult to know which they should let influence them. Should they listen to the five 'famed investors' who think a crash is coming and think about selling their shares en masse, or should they start buying more based on the alerts of a 'century-old indicator'?
The reason there are such drastic differences in opinion is because it is essentially impossible to know exactly what the market will do next. Indeed, there will almost always be some bearish indicators, just as there will be some bullish indicators. The never-ending stream of data can be interpreted in any-which-way, while the financial media can also sensationalise the most outlandish calls – particularly when they are more fear-provoking in nature.
For example, consider these predictions from Jim Rogers spanning back to 2011:
2011: 100% Chance of Crisis, Worse Than 2008: Jim Rogers
2012: Jim Rogers: It's Going To Get Really "Bad After The Next Election"
2013: Jim Rogers Warns: "You Better Run for the Hills!"
2014: JIM ROGERS – Sell Everything & Run For Your Lives
2015: Jim Rogers: "We're Overdue" for a Stock Market Crash
2016: $68 TRILLION "BIBLICAL CRASH" Dead Ahead? Jim Rogers Issues a DIRE WARNING
2017: THE BOTTOM LINE: Legendary investor Jim Rogers expects the worst crash in our lifetime
Although each of the headlines above were in relation to the U.S. markets, they're written all the time about Australia's share market as well.
The point is, investors should be hesitant to act on each sensationalised headline they read, regardless of whether it is meant to create fear or an excessive amount of optimism.
Instead, they should always be prepared for the worst: hold some cash (in case of emergencies, or for taking advantage of great investing opportunities) and invest in businesses the investor believes are capable of withstanding tough economic conditions.
Ideally, these should be businesses with strong balance sheets and resilient income streams, and are run by high-quality management teams. Although there's still a good chance the shares will fall during a market downturn, you can at least have confidence that the business itself remains sound. Bapcor Ltd (ASX: BAP) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) are good examples of these types of businesses, along with CSL Limited (ASX: CSL).
Foolish Takeaway
Markets will rise, and they will fall – sometimes more than many of us are comfortable with, within a very short space of time. But rather than constantly fretting about a market downturn, or even a crash, choose to focus on the long-term. That is, buy shares in businesses that you'd be happy to own, regardless of the market's conditions.
