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Watching the markets | The search for equilibrium

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By Capital Partners Markets and Investments

There’s no doubt that these are disconcerting times and we are watching events in the markets closely along with everyone else.

Where we see the markets fall as we have the newsreaders lead with things like, “the sellers were out in force today”, could leave you wondering if there are so many sellers out there, who is buying? It doesn’t take long to work out that for every sell transaction, there is someone on the other side buying.

So the notion that in bear markets sellers outnumber buyers just doesn’t make sense. Of course, the newscasters should say that there were not enough people willing to buy shares at the prices the sellers were seeking today.

Markets are about equilibrium, and on a normal day, the number of buyers and sellers negotiate over the price of a share in a reasonably narrow range. What tends to happen in markets like these is that buyers simply sit on their hands and do nothing, so it is easy to see how a share can fall in value on reasonably low volumes. That is, the seller wants to sell, and the price just keeps going down until a buyer steps in and makes the trade.

In such a case, either the would-be sellers sit on their shares or prices adjust lower until supply and demand come into balance. This is when transactions occur and are described by economists as “equilibrium”.

But equilibrium isn’t a permanent state. That’s because new information continually is coming into the marketplace, forcing would-be sellers and would-be buyers to adjust their expectations constantly.

That new information might be company-specific news like an earnings warning. It might be news that has implications for an entire industry—like a spike in oil prices forcing airline stocks lower. Or it might be an economic development that affects the entire market, like a change in interest rates.

Given this constant flux in news and information flows and the forever-changing expectations of participants, individual securities and the market itself are said to be always moving toward equilibrium.

Applying this knowledge to your own circumstances follows that it is simply not the case that everyone except you is heading for the door right now. Indeed, most prudent investors, those holding diversified quality portfolios, are hanging on comforted by the knowledge that at some point, supply and demand for shares will come into balance.

Buyers eventually will see value in the market, will regain confidence and will invest.

When markets are going down, it is reassuring to remember you will not be the last man standing. The reality of where we find ourselves today is that most long-term investment portfolios today look pretty much the way they did a year ago. Sure the prices are down some, but the long term focus on a diversified quality portfolio has not changed.

Trying to time these inflexion points is tough, and the temptation to jump out now and get back in when things are better is enticing. But it’s a fool’s game because prices tend to move randomly. So it is next to impossible to predict with any consistency what the market will do next.

This, in turn, reflects the difficulty of successfully forecasting the future. That doesn’t stop many people from trying, mind you. And sometimes they get it right. But that’s usually down to good guesswork, not a scientific method.

But during times like these, investors can comfort themselves in the knowledge that in a market economy, there is a return on capital over the long term. If there wasn’t, capitalism would no longer work.

So rest assured, there are still plenty of buyers out there.

The market is doing its job, and the long term rewards will be there if you remain disciplined and diversified.

The information provided on this site is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different and you should seek advice from a financial planner who can consider if these strategies and products are right for you.

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