THE CHANCE OF A LIFETIME?
As originally appeared in The Jerusalem Post on December 28th, 2018.
There are risks and costs to action. But they are far less than the long range risks of comfortable inaction.
-John F. Kennedy
Higher interest rates, a trade war with China and a Democratic-led push to try and impeach President Trump have sent global stock markets crashing. The last 3 months have essentially wiped out a year and a half worth of market gains for investors, as well as contribute to a few more grey hairs for their advisors! As a result, many investors have decided to head for the hills and cash out their stock holdings- probably not the smartest thing to do but that’s for another article.
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 summer 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 chain had a 20-30% 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 (MSFT) or AT&T(T) have dropped significantly, with no change in their specific business. They continue to pay very high dividends and they can be bought at 15-30% off where they were trading a few weeks ago. Now I am not saying to run out and buy either one of these. They are just examples of what I am talking about.
When you filter out all the presidential tweets, and other noise that may be contributing to the market drop, you will see that the financial state of many top corporations is very strong. Earnings reports continue to show strong earnings growth with equally strong future outlooks. When things calm down and rational thinking starts to take over, the 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 7 year or longer outlook than short-term swings shouldn’t cause worry and you should keep your eye on the long-term performance of the stock market.
Based on the phone calls I receive, 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 a few weeks ago. I mentioned a client call that I had received about the market drop and her portfolio. She 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 sub-prime crisis of ’08 when the stock market dropped more than 30%, she still 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.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.gpsinvestor.com or email aaron@lighthousecapital.co.il.
