Are you worried about Evergrande?

As many clients have noticed, the stock market, measured by the S&P 500 Index, has dropped for 9 of the last 12 trading days. This has caused a few worried clients to reach out, particularly after the stock market fell another 1.7% on Monday, Sept. 20th.


One major story that is making headlines is Evergrande, a Chinese real estate developer who will fail to meet their debt obligations as early as Thursday without a bailout. At Illuminate, Evergrande came on our radar earlier in the summer, several months before it became headline news. In June, China’s financial regulator began conducting stress tests on an Evergrande failure, which suggests that there were concerns by regulators of this type of situation well before then. This is also evidenced by the fact that bonds were priced at 49 cents on the dollar as early as July 2021, which means the ‘market’ was concerned.

Our belief at that time, and still continues to today, is that:
This may be a “black swan” type event, leading to cascading effects that lead to a global recession, or, much more likely, this is a localized hiccup that could have ripple effects to some areas of the global economy but isn’t a “Lehman Brothers” type event that many in the media are calling for. In either case, the best course of action is to stay invested, focusing on the long-term.

Remember why you invest: You have goals/hopes/dreams for the future and you are willing to risk the short-term loss for the potential for long-term gain, allowing you to achieve and maintain the life you want. The last few weeks of stock market moves have NOT “moved the needle” at all for your Retirement / Financial Independence projections. These potential short-term moves are already built into the financial planning projections we run.

Now, that doesn’t mean that it is emotionally preferable to have stock market drops but being prepared for quick market drops is essential for disciplined long-term investing. We believe that higher market returns, such as those in stocks versus just holding cash, only come by taking on more risk. You should think of volatility as the “price of admission” to achieve higher long-term returns. Without volatility and occasional feelings of uneasiness, you wouldn’t be taking risks and therefore couldn’t justify higher returns.

Back to the headlines at the moment: Many are comparing the Evergrande risk as a “Lehman Brothers” type of risk, bringing back a lot of concern about the risk of a contagion leading to something akin to the Great Financial Crisis of 2007-2008. However, this could very well be like the Greek Debt Crisis in 2010-2012, the US Fiscal Cliff Crisis of 2012-2013, the extreme stock market volatility in October 2014, the 2015 to early 2016 China-lead stock market crash, the 2016 Brexit Crash, the 1600 point Dow Jones drop on Feb. 5, 2018, the 2019 “Yield Curve Inversion” panic, or the 2020 Covid Stock Market Crash. Even with all of these “crises” almost every year, from 1/1/2010 to 12/31/2020, the S&P 500 returned 322%!

Most importantly, remember to focus on the long-term. If your time horizon for investing is longer than 10 years (which every client we have qualifies), then you should be cheering for a stock market drop. This allows us to rebalance the portfolio and reinvest at lower prices. If viewed from a long-term perspective, volatility of the different asset classes within your well-diversified portfolio is a positive for your long-term investing success. Risky assets like stocks can be down for years at a time, but we believe in long-term, disciplined investing. Even if this Evergrande event leads to a Covid-style rapid stock market crash, you, as well-diversified, long-term, and disciplined investors are primed to likely benefit overall. Stay focused on the things that matter and stay the course. 

If you want to talk about these or anything else, reach out!