Jan 21, 2016 4 min read

This is the first installment of ‘Your Financial Future,’ a monthly column by Gary Boatman, a certified financial planner based in Monessen.

The U.S. stock market’s 2016 debut was its worst opening week in its history, marked by a 6 percent loss. Many analysts would agree the number one reason is problems in China.

For many years, China enjoyed one of the largest economic growth rates of all countries. Its population is four to five times that of the United States. Many of its people live in rural, undeveloped areas.

China is famous for its low-cost labor rate. Many workers work long shifts in bad conditions for low pay. In many Chinese cities, people wear masks as they walk outside to protect themselves from air pollution. Counterfeited goods are widespread.

The citizens were demanding better conditions, and American companies were requiring their suppliers there to provide improved work sites. This has made China a major purchaser of commodities and other materials to improve its infrastructure. Copper, oil, steel and other commodities enjoyed good returns because of this construction.

It is important to remember supply and demand is one of the most basic economic rules. When more people want to buy something, prices increase. When growth in China slows like it has now, prices decrease. This has a major impact on many industries’ profits. As stocks are often valued by their earnings per share, their prices tend to move lower.

The issues in China go beyond lower demand. The government tries to manipulate markets by constantly changing the rules. A few months ago, it declared major shareholders in Chinese companies could only sell up to 1 percent of their holdings every three months. Some smaller investors dumped their holdings because they feared the ban was about to be eliminated.

China installed circuit breakers that close its market if stocks drop 7 percent. This halted trading twice in one day and again two days later. It did not have the desired effect, as outside investors don’t like market manipulations. Transparency and knowing the rules are a basic requirement for investing.

After the first four days, the Chinese stock market was down 21 percent from year’s end. China’s central bank cut interest rates eight days to try to stimulate borrowing and increase the economy. The resulting fluctuating value of China’s currency created ripple effects around the world. All of these events negatively impacted world markets.

What does all of this mean to investors in Western Pennsylvania?

Regardless of the scale of China’s impact on markets, the basic tenets of investing must remain intact. Money you will need in the next few years should not be in the market. Younger investors, who will not need the money for years, do not need to be as concerned. If they keep buying every month, they will be dollar-cost averaging and time will smooth out the bumps.

People close to retiring or those already retired are in a completely different situation: Sequential risk, a topic we will cover in in a later column, could wipe out their retirement savings.

For retirement, it all starts with an income plan that provides money with the same regularity as your paycheck did.

Regardless of what type of investor you are, do not try to time the stock market. No one can: not you, me or Warren Buffett. Your market money must always be in the market, and your non-market money can never be in the market. When you pull money out when the market is going down, you lock in losses and you could miss some big bounce-back days. If you have money in the market that you need in the short-term, it may not be available when you need it the most.

The first decade of the 21st Century was known as the lost decade because the S&P 500 had a loss for the whole 10-year period. Everyone knows the goal of investing in the stock market is to buy low and sell high. The problem is many investors do the exact opposite because they get scared and think they can time the market.

Gary Boatman is a certified financial planner with 20 years of experience based in Monessen whose column appeared in Western Pennsylvania newspapers for several years. He is the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, contact O-R Business Editor Michael Bradwell at mbradwell@observer-reporter.com