Hello my friends, sorry for a bit of an absence. It’s been pretty hectic in Andy-land lately! But regardless I think the recent wave of stock market unpredictability (there’s been a lot!) deserves a few thoughts. So, without further delay, let’s talk about stock market volatility. And Cheeseburgers!
First, a few facts to illustrate what’s been happening in the stock market. And these have all been within this past week!
- On December 24th the 30-stock Dow Jones Industrials dropped 653 points. That was the worst-ever Christmas Eve loss for the stock market in history.
- On December 26th the Dow increased by 1,036 points. That’s the biggest one-day point-gain for the stock market. In history.
- On December 27th, from its lowest point during the day to its closing price the Dow increased by 850 points. In its 120-plus year history that was the biggest one-day point rebound in the Dow ever.
- The Dow and the broader S&P 500 is on track for its worst December since 1931 during the Great Depression!
What’s going on here? First, I’d like to give some opinions of the issues behind the craziness in the markets. Then I’ll give you some ideas you can use in response to that craziness. These aren’t presented in any particular order. Also, while I do have political opinions. these aren’t meant as any kind of political commentary.
Why the Volatility?
- The Federal Reserve has been raising interest rates. In general, this has the effect of slowing consumer and business spending and potentially the economy as a whole. There are also reasons in support of raising interest rates but that’s too far into the weeds for this post.
- Investors hate uncertainty and there are a lot of uncertain issues right now:
- There’s a Federal Government shutdown
- Staffing at senior levels of the Federal Government have seen a lot of flux
- Geopolitical concerns around the globe are numerous
- There’s a trade conflict with China
- And if nothing else, this “bull market” (increasing stock prices) has been going on for nearly ten years. That’s a long time in market terms.
Let’s talk about this last point for a second. Sorry to hit you with a bit of statistics but here’s an important term called Reversion to the Mean. That’s just a way to say that when stocks go up – at some point – those stocks are likely to come down again. So, in practical terms a stock market that’s raged higher for ten years is likely to come back down to earth. The real questions aren’t whether the current market will fall, but rather when it will fall and by how much. (The opposite is also true: beaten down stocks typically find a level that investors determine is “cheap” and then the stocks go higher!)
What about Those Cheeseburgers?
So, what should you do? As a general rule I’d say not much. When the market’s going down, the key to your survival as an investor is to have planned in advance consistent with your goals, timelines and risk tolerance. And to stick with that plan! In this way events over a particular day (or maybe even month or year) have a lot less relevance compared to your long-term goals.
But depending upon your risk tolerance there are ways to try and profit from market turbulence. In a strategy called “Buy the Dip”, you buy shares of your favorite index fund when the market is in turmoil. That way you end up purchasing more shares at a lower price than you would otherwise. BUT PLEASE BE WARNED: this strategy doesn’t guarantee that you’ll make money or that you won’t lose money. But it’s the strategy that I’ve followed profitably for many years.
Let me give you an analogy. If you like a cheeseburger that costs $2.00 each, you should really like that same cheeseburger on sale for $1.50 each! So, in the Buy the Dip strategy you end up buying the $2 cheeseburger for $1.50. And I get it: for some reason many of my readers are either vegans or vegetarians (which is just ironic considering my great love of all-things carnivore). But the analogy remains: buy a veggie burger when it’s essentially on sale, and that makes for good investing in the long term.
Hopefully this provides some perspective. In the meantime, if you like these posts please drop me a line at firstname.lastname@example.org. And better yet, drop me a line and pass this post on to a friend or two who you think may benefit from these insights!
Thanks so much for joining me and Happy New Year. I truly appreciate it!