SITTING IN CASH? NOW IS THE TIME TO MAKE MONEY
“The way to make money is to buy when blood is running in the streets.” – John D. Rockefeller
The news isn’t pretty. The stock market continues to drop. ISIS continue their murderous rampage. Chinese economic growth has dropped significantly. Canada has slipped into a recession. Iran is about to be given the keys to a nuclear weapon. Things don’t look so great, and it’s hard to find a silver lining in all this bad news. As a result, many investors have decided to liquidate their stock holdings.
But if you are a first time investor or just sitting on a pile of cash, this could be an ideal situation. This may turn out to be a once in a lifetime opportunity. Why should novice investors or those with large cash positions take the risk now, when the markets are falling, to start investing?
Buy Low/Sell High
One of the most important rules in investing is to buy low and sell high. Although there is no sure way to declare that the market has finished falling, it is certain that the market would be cheaper after a 16% decline than it was 16% ago. In other words, the market is somewhat “on sale.” No one likes buying retail, and with the recent market pullback it could feel as if the investor is buying wholesale! There is no question that if your local supermarket was to run 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 Johnson & Johnson (JNJ) 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 15-20% off of their trading price 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.
Investors need to differentiate between the state of global corporations and the macroeconomic state of the global economy. While the economy stinks for all intents and purposes, the financial state of many top corporations is very strong. Earnings reports continue to show strong earnings growth with equally strong future outlooks. In this recent market rout, attention has clearly been placed solely on the murky economic situation. No guarantees but when a bit of calm returns to the markets, focus may very well shift back to corporate earnings and the realization that some very good companies are trading at very cheap levels.
Time the market?
I often hear from my clients that they want to sell and when the market goes back up, they will buy back stocks, and make lots of money. As if it is so easy! One of the biggest risks of trying to “time” the market is the potential of “missing” the market. This is when an investor, thinking the market will go down, reallocates his investments and places them in more conservative investments. But while the money is on the sidelines, the market shoots up. The investor has, therefore, incorrectly timed the market and “missed” the best performing months. When the Dow Jones Industrial Average opened up down 1000 points last week, panic set in and may investors decided to sell and wait on the sidelines until the market was going to move up. Well it took 3 days and the market had recovered that initial 1,000 point drop. If I had to guess, I would say 99% of those who sold on that very day didn’t time the market correctly. That means that not only did they sell at very low levels, but they missed the huge move back up. The complete opposite of the buy low/sell high philosophy!
Now What?
As those sitting with cash have learned, cash returns virtually zero 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, especially dividend payers. To get started, consult with a financial adviser, who will help you to determine if stock investing is right for you.
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.
