Keeping your cool while others lose their minds over their investment losses.
Since 2009, US investors have been enjoying the second longest running Bull market since WWII. But after closing once again at record highs on January 26th, 2018, the market started slipping into a correction. The two week period ending Friday February 9th 2018 saw a river of red on Wall Street. Historic losses occurred almost every other day, and the Dow closed down 1175.12 on Monday Feb 5th. Less than a week later there was a second four-digit drop. In spite of all the excitement we are still ‘technically’ riding the Bull, despite the specter of the Bear periodically swiping at the markets and making the red ink spatter everywhere. So far it’s only a correction, and not yet a crash. If you’re not sure of the difference:
- A stock market correction is when the market falls 10 percent from its 52-week high.
- A bear market occurs when the market falls 20 percent.
- If the market falls 40 percent it’s considered a crash.
So what makes the markets suddenly drop? The reasons are many, but usually it starts when large numbers of investors decide to ‘cash in their chips’ so to speak and lock in their gains. Perhaps companies didn’t make their earnings projections, or investors are afraid that changes in legislation will affect profits. It does not matter but once enough people are selling instead of buying, stock prices start dropping. This spooks the second group of investors who now sell because the price is dropping, and they want to stop losses. This leads to a panic. Once a cascade sell-off effect begins, the only way to stop it is if enough potential investors decided to buy the dips, thus raising the price of stocks and ending the sell-off. Or possibly not. Prices of the shares may recover enough that a third group of investors decide that now they should sell and lock in the partial recovery of lost potential gains, starting a brand new sell-off. That’s why you start seeing these roller-coaster swings of market volatility.
The key take away from all of this is that middle group of investors who sold out as the stocks plunged ended up losing their money. It is impossible to time the market. They were not in the market once it rebounded, which time has shown it will. The group who locked in at the market peak made money, and if they returned to buy the dips, they made even move money. When investing in stocks, you need to keep your head and make informed, intellectual trades. Emotional, panic sell-offs will hurt you financially.
Overtime, the stock market will continue to grow at an average return at about 12%. Crashes, corrections and Bear markets always lead to new Bull runs. These market fluctuations are a normal part of the way the stock market grows and are not to be feared. In September of 2017, stock guru Warren Buffet was widely quoted for stating that he believed that in one hundred years, the Dow would hit one million points. When one of the eight richest men in the world tells you stock tips, you listen! Buffet didn’t get rich by luck. He recommends buying stocks when everyone else is liquidating their assets because you pick up bargains that given time, will more than likely rebound. He also recommends staying in the market and investing in passive, low fee index mutual funds and ETFs that track the markets. In many cases these index funds outperform the majority of actively managed mutual funds and offer a low-cost way for investors to track popular stock and bond market indexes while providing a diversified portfolio at the same time.
I’m getting too old for this excitement.
Although index funds and ETFs offer diversification they are still tied to the market. This is great news if you are young, because you can weather any storm clouds that the market may encounter. On the other hand, if you are nearing retirement and counting on your retirement nest egg being a certain amount, you don’t want to find yourself in a situation where you’re weeks away from punching the time clock for the final time only to have a sudden market crash wipe out 40% of your investments. This is where a higher level of asset diversification towards less volatile investments will protect you. Bond funds, precious metals and even real estate can provide a much more stable investment, just with comparably lower returns on investment. Only you can determine your individual retirement needs.
Two general rules of thumb based on age.
1) Take the number 100, and subtract your age. The remaining number is how much money you should invest in stocks.
2) Take the number 125, and subtract your age. This number is the percentage of your investments which should be in higher risk stocks.
Some stocks are more volatile than others. This is reflected in a stocks beta number. The lower the number the more stable the stock. A beta number of 2.0 would fall twice as fast as the market, while a share with a beta of 0.5 would drop half as fast. Also you should research the 52 week highs and lows, as well as the P/E ratio and if the stock pays a dividend, how often it’s paid, and the what the ex-dividend date is. Bottom line, DO YOUR RESEARCH! Financial matters are nothing to joke about. The wrong decisions early on will greatly impact you in your retirement years.
Now I’m still south of 50, I’m unmarried, I have no children, plus I’m debt free. In my individual circumstance, knowing what I know and being willing to accept the risks, I tend to have ALL of my investments in higher risk assets. Thus far, it’s made me the richest man in my family, although it does get unnerving at times when you watch your portfolio take a big hit during a correction. In the past two weeks, my net worth decreased by more money than some people earn working a full time job for an entire year. It will come back given time, but a financial loss like that would have killed my mother.
My father, George Henry Lawrence Oetting Jr. was an intelligent business man. He went to St. John’s University, was a CPA, and was the editor of a local Queens newspaper. He understood how money and finances worked. That’s him in the photo above. I used to think that the screaming woman in the picture was my very melodramatic mother, but I’ve since learned it was a just a family friend. But I do remember that look. Everything was a tragedy for my mother when things didn’t go her way. Now my father was a newspaper editor, so he was always on top of trends in business and investing opportunities. He owned 50 shares of stock in a growing company called McDonald’s. I’m sure that this is why my mother grew obsessed with the cheap burger brand. My father was great with finances. My mother? Not so much. That woman couldn’t handle money to save her life. If you gave her a dollar, she’d spend two! Anyway my father died suddenly when I was young, so he never saw the grand openings of the first NYC McDonald’s in Manhattan. My mother got re-married to her boss a year after my father died. About that time, the first McDonald’s in Queens opened at 13832 Jamaica Avenue, Jamaica, NY 11435. My mother still owned the stocks at the time, and she was there with my stepfather acting like she owned the place because she was a share-holder! I remember there was a guy dressed like Ronald McDonald and he was signing these stuffed Ronald dolls and my mother was buying them for all my cousins. She probably blew $100 that day on food and memorabilia which says a lot considering at the time the burgers were ONLY 30¢ each. Anyhow, a year after that, my step father also died. A year later, my mother was dead broke. Between 1971 and 1975 she’d lost 2 husbands, 2 houses, the lifetime savings of two men, and those 50 shares of McDonald’s stock, which if I still had them today would be valued at three-to-five million dollars. A fool and their money are soon parted. My mother may have cost me a fortune because of her foolish spending habits, but at least I managed to inherit my father’s good looks and intelligence, and those pay their own unique dividends. I’d like to believe he’d be impressed and proud of the man I grew up to be. As always I wish you happiness and success!