The markets are in turmoil from weak jobs reports, gushing oil, protests, currency values, regulations and more. Prices wave and drop; the VIX fluctuates. Mr. Market has a panic attack on Monday, celebrates on Tuesday, and then flips out again on Wednesday. And it’s been going on for weeks. Glorious chaos.
In such times of gloom and uncertainty, should one invest in stocks, or stay as far away as possible?
The answer depends on your timeline and your stomach. How much do you worry about money? If your stocks were to drop 30% from today, would you be distraught? Would you feel regret, or anger? Would you lose sleep? If so, buy a GIC and forget that the markets exist: they are not for you.
In the last week of May, outflows from long-term U.S. mutual funds reached almost 17 billion dollars. This means that retail investors (your parents, your friends, your coworkers) were fleeing the market in droves (and still are). They told their friends they were selling because they are clairvoyant and “knew” the market would drop, but really it was because they were scared. So they sold, and their selling indeed made the market drop.
Most people start out with every intention of being a long-term investor - “I’m going to keep these until I retire.” Then they watch the news, until finally they break out in a cold sweat, panic and sell. Retail investor capitulation (i.e. “giving up”) is a valuable buying signal.
In volatile markets such as this, with countries around the world at very different stages of crash and recovery, it’s important to keep your margin account well margined or your cash account in cash, in order to take advantage of opportunities as they arise. There is nothing worse than to see the market fall and not be in a position to take advantage of it.
Will U.S. stocks go lower from here? Maybe, since financial news reporters don’t look lugubrious yet. But, maybe not. No one actually knows what will happen in the markets next week or next month, and the sooner you accept this fact the better.
What is known is that by all reliable methods of valuation (P/E ratios, price-to-book values, ROE to bond rates etc.) many U.S. stocks are both healthy and cheap. Seek them out. Within 5-7 years, today’s stock prices will look laughably low.
“Five to seven years!” you might be thinking. “I’m not waiting that long!” If so, your disposition is probably that of a trader, not an investor. Investing requires the patience and fortitude to wait until the next period of euphoria to sell, and that could realistically be years away. I don’t mind waiting several years to triple my money (or more). How about you?
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“The markets are always wrong. At some points in time they are more wrong than others.”
George Soros, The Alchemy of Finance (in response to the notion that “the markets are always right.”)
