Current Market Considerations. A Few Reflections, ThoughtsBy Felipe Martinez | Mon, 07/11/2022 - 11:00
With the downturn we’ve been experiencing in the stock market in the last few days, some investors are left thinking about how to prepare for a recently entered bear market.
Rising interest rates are also having an impact on the real estate market. And that's all in nominal currency. If we add on the effects of inflation, for some investors the reaction might be one of despair and the feeling that they’re losing a big portion of what they have worked so hard for.
If you are one of those who might be starting to lose sleep, here are some considerations that may serve you well as friendly advice.
This too shall pass. It's temporary and the sun will come out again. It might be a short period or a not-so-short one. But it's temporary, nonetheless, as history has shown us repeatedly.
Although each case may differ in the specifics, taking for example how often, following bullish bubbles, like those in the US in 1929, 2000 and 2007, comes a period when the bubble eventually pops, as it did in 1929, 2001 and 2008 respectively.
During the 1929-1932 period, there were several bear markets as part of the Great Depression. Measured against leading economic indicators, such as stock market value loss, economic contraction and unemployment, this period was one of great despair for many, from small families to large corporations and investors.
Similarly, throughout 1999-2002, total US venture capital investments rose and declined sharply as part of the correction after the bubble burst. This so-called dot-com bubble saw many dot-com startups go out of business after burning out their venture capital, which took advantage of the hype many companies gained without sound business foundations; for example, sometimes just having a .com website was enough for the company to raise capital. Ultimately, when the company was unable to turn a profit for their investors, all that private investment practically vanished. Under the principle that the internet was a new tool that could bring together buyers and sellers in a global and seemingly easy and cost-effective way, dot-com entrepreneurs could run to their closest venture capitalist and raise funds for their dot-com enterprise. However, the mismanagement of capital investments by many of these entrepreneurs ended up correcting itself in the 500-plus day bear market that followed.
The aftermath of the 2007-2008 economic crisis hit the housing market pretty hard, and unemployment in the US, Mexico and other parts of the world jumped significantly.
Other relatively fresh economic downturns include the one initiated in February-March 2020 due to the global pandemic and its impact on almost all countries with devastating human and economic losses.
Bear markets are a normal part, by and large, of the economic cycles markets undergo and should be understood by investors. Short-term investments should be avoided during a bear market, while longer-term investments are likely to endure the downward part of the cycle.
With this in mind, long-term investors continue to allocate their capital as per their long-term investing plan, no more, no less. The long-term rate of return you get on the money you are investing now will be higher than the money you invest at the peak of a bull market.
One way to look at this, in the investment lingo, is that with enough research and risk awareness one can subscribe to the buy-the-dip strategy of several investors, when they go long on a set of securities after its price drops in the short term, once or several times. This consequently can include two possible outcomes: buying when prices are low can represent a true bargain should these assets or securities bounce back up in price, or, on the other hand, if the prices stay low indefinitely or the company even goes out of business or goes bankrupt, making it unprofitable, then the investors could lose their position completely and with that, their capital. Oftentimes, the latter course of action is realized when the dip in prices is due to fundamental issues with the business, such as losing money constantly and continuing to operate at a substantial loss and with poorly leveraged debt.
For the ordinary investor, it is hard to gain meaningful insight to tell the difference between a momentary price decrease and an extremely long or even permanent one. While in the midst of the dip, the market may be overlooking true underlying value; increasing the exposure of an investor's portfolio to the price fluctuations of that one company solely to decrease the average cost of ownership may not be an acceptable argument for everyone. Henceforth, when following a buying-the-dip approach, the risk and reward needs to be thoroughly evaluated in the context of the dip and its outside influences.
As noted, the reduction in the value of an asset can occur for a variety of reasons, including changes in its underlying value. If after doing your due diligence, you want to increase your position in a given security, you can actually lower your net average price when you buy it during a dip in its price, as you will be averaging down the cost of your position. But, don’t forget to make sure it is within your risk-reward tolerance.
Just as investors like to grab the bull by the horns (metaphorically, of course), some might say to grab the bear by the nose or the ears might also apply: stay the course with your investing plan. This is better suited for, again, long-term investing schemes. It is recommended to limit the noise you can absorb from the news since it is likely that after reading that the market just dropped yet again, it is human to fear losing a big chunk of your money in the market and react emotionally, which usually only brings more risk and loss than protection.
If you want to read your statements, do it stoically and with your long-term plan in mind to avoid changing it suddenly because of what might be just the buzz of the moment.
If you can't seem to find anything positive in the financial news, you're probably spending much too much time watching the news or reading from similarly biased sources. So, one solution is to avoid watching or reading the news altogether. To keep up with what's going on in the world, try to be more selective and critical about where you get your news, especially financial news.
As some legendary investors say, no bear market will last forever because, fundamentally, human progress and business success in our developed world will continue to thrive and with that the financial gains and opportunities out there. Once again, buckle up, and this one too shall pass. It is going to be alright!