‘The way to make money is to buy when blood is running in the streets’ – John D. Rockefeller
‘The way to make money is to buy when blood is running in the streets’
John D. Rockefeller
Higher interest rates, raging inflation, the very real threat of a recession and the continuing war in the Ukraine are just some of the reasons that have sent global stock markets tumbling. The last six and a half months have essentially wiped out a year and a half worth of market gains for investors, as well as contributed to a few more gray hairs for their advisers!
It’s hard to find a silver lining in this situation, but for investors sitting with cash or for young, first-time investors, this could be an ideal situation. This may turn out to be an unbelievable opportunity.
Buy low/sell high
According to an old investment adage, one should buy when prices are low and sell when they are high. Although there is no sure way to declare that the market has finished falling, it is certain that the market is cheaper now after a 20% decline than it was 20% ago in the winter, when it was at a record high. In other words, the market is somewhat “on sale.”
Not to get too stereotypical, but let’s face it, as consumers, no one likes buying retail, and with the recent market pullback, it’s as if the investor is buying wholesale! If the Rami Levi or Osher Ad supermarket chains had a 20%- to 30%-off sale, shoppers would be lined up around the block to have a chance to make purchases at rock-bottom prices.
Blue-chip companies like Microsoft or J.P. Morgan have dropped significantly. They continue to pay dividends as well, and they can be bought at 30%-35% off from where they were trading a few months ago. Now, I am not saying to run out and buy either one of these. There are reasons that they dropped, and investors need to do their own research before deciding to purchase stock. They are just examples of what I am talking about.
When you filter out all the noise, you will see that the financial state of many top corporations is still strong. Earnings reports may show some lighter earnings growth in many sectors as the economic turmoil takes its toll. But does that small economic hit justify the large drop in stock prices? When things calm down and rational thinking starts to take over, focus may very well shift back to corporate earnings and the realization that some very good companies are trading at very cheap levels.
Now what?
As those sitting with cash have learned, cash returns little in the way of interest. Long-term holding of cash not only costs you in returns but also in the loss of purchasing power due to inflation. Now may be the time to take advantage of the recent market plunge and take a look at starting to invest in stocks.
It’s important to remember that you can lose money in stock-market investing, and there is certainly no guarantee that the market won’t continue to drop. Remember that short-term volatility happens all the time, and markets can and will drop. Just look at what is currently happening.
The most important aspect to determine how to react to market jitters is to figure out what your time horizon for the investment is. If you have a short- to mid-term time horizon, you have no business investing heavily in stocks. If you have a seven-year or longer outlook, then short-term swings shouldn’t be cause for worry, and you should keep your eye on the long-term performance of the stock market.
Based on the phone calls I have received, it’s clear that even those pondering investing for the first time are quite nervous. To illustrate the power of investing over the long term, I will repeat a story I wrote about in this space. I mentioned a client call that I had received about the market drop and her portfolio:
“One of them asked me what I thought, and I said that since she has a 20-year horizon, trying to time the market is silly and that she should stay the course. We then went back over her long-term returns and found that because she stayed fully invested during the subprime crisis of ’08 when the stock market dropped more than 30%, she still more than doubled her money if you look at the account value pre-market crash. That was eye-opening for her and convinced her to not panic.”
If you have un-invested money that you don’t need in the short or medium term, now may be the time to try and take advantage of the market drop.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
www.aaronkatsman.com
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing, is a licensed financial professional both in the US and Israel and helps people who open investment accounts in the US.