Today, as I write this at 10:30am Denver time, the stock market is in hefty selloff. However, truth be told, the past few years it has been normal to see the S&P 500 move more than 1% in a day. With each decline we all wonder if this is the first decline off the recent peak valuations and we’ll go back down to the October lows of 2011 or even lower to March of 2009. One investor will hope to whoever he or she prays to that this will happen, with the premeditated plan of staying in and at a minimum enjoying seeing their dividends reinvest into lower share prices. If they are lucky, the investor will have some positive cash flow or some cash available to buy into those lows. Indeed, with each sharp decline the smart investor should be telling himself (or herself), “I may never see stock prices this low again in my lifetime.”
The smart investor starts pinching pennies when the market goes down in order to put those pennies directly into the market. This investor is seeking to invest while the market is low in hopes of being invested during a recovery. The lemming investor sells their stock with the masses, puts it in cash and starts pinching pennies and adding those pennies to that cash pile which is losing its worth at whatever the inflation rate is.
When I think back at the past four years of financial history, we’ve indeed been lucky to get 50 yard line tickets to these unprecedented times. Statistics show that the investing public fail miserably at trying to time the market (investment flows in and out of the market is public information and easy to find). We know that with each financial apocalypse du jour, investors as a whole are pulling out and that even as the capital markets have improved and increased in priced they haven’t bought back in.
In September 2008 when Lehman, AIG, Fannie, Freddie and WaMu failed (along with Merrill Lynch and Wachovia being sold at fire sale/brink of collapse prices), many investors jumped off the train (i.e. sold out of the stock market). Equities recovered and most investors did not get back onto the stock train, instead those who were in waited and as the European debt crisis continued to unfold and many more people jumped off the train (and some who had jumped back on, jumped off again). And then, over the summer of 2011 as the US debt ceiling standoff led to the US credit downgrade compounded with more European woes, even more people jumped off the train.
Since I am, by most accounts, human, I completely sympathize with this fear. Our parents and perhaps even grandparents never had to sit through such a period of prolonged volatility. And that’s just the point, while this period has been unsettling, when it came down to it, it was just volatility. All the while through this period, many underlying companies have continued to grow and have not been this healthy and profitable ever. Before all this you would hear of companies with “fortress balance sheets”; now it is fairly common.
Again, as I write this, the market is going down. The S&P 500 is at a price about where it was just before all of these scary things that caused people to panic out of the market. But more importantly, the significance of the price right now (roughly 1340) is that it’s at a price that is higher than any of the points that I described above. At the time of each of these crisis points, it felt wise and invariably felt relieving to exit the roller coaster; in the end, it was a bad decision and those investors who duped themselves because now they’ll have to pay a higher price to get back in. While we understand that hindsight is 20/20, it is important not to let emotion determine when you jump in and out of the market.
Naturally, nobody knows if the market is on the cusp of another sharp decline, but investors should look at any decline as good news and an opportunity. I fear however that long ago the conductor has yelled “All aboard!” and the train has left the station.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.