Be Greedy When Others Are Fearful
Among many great quotable statements, one of my favorites from Warren Buffet is to be “fearful when others are greedy, and greedy when others are fearful.” The second part of that quote is what truly separates good investors from bad.
When the markets are down and we face uncertainty in the economy, it is easy to be fearful and pessimistic. Since it is so easy, being negative tends to come naturally.
True optimism, on the other hand, requires you to act; assessing a situation, realizing all is not lost, and forging a path forward to prosperity.
While we want to be positive and focus-forward, it is still important to be honest about current events. Let us talk about the negative for a moment, then we will talk about an action plan and positive strategy.
When I wrote my last newsletter article, I quoted inflation as being 5.4%. It is now 8.54%. Supply chain shortages continue to strain our economy. Russia invaded Ukraine. The S&P 500 is -11.48% YTD. The NASDAQ is down -19.26% YTD. COVID version “X” is cropping up. Need I go on? You get the picture. There is no shortage of negative news.
Here is what I recommend going forward:
1) Be smart with your existing investments.
2) Take advantage of downside strategies.
Be Smart With Your Existing Investments
Stocks, bonds, mutual funds, and exchange traded funds are assets. They are real, monetary instruments and assets. Do not be reckless with them. Simply put, do not sell them when they are down. I cannot emphasize that enough. It sounds so simple, but the best advice often is. Admittedly, simple does not always mean easy, and in most cases, is much harder to practice.
Maybe a different perspective will help you not be tempted to dump important investment assets when they are down. When you hold a certain number of shares in an investment, the decrease of market value does not evaporate your shares. You still own the same number of those assets. Let’s say you own 1,000 shares of Amazon (congratulations if you do) and the stock absolutely tanks. You will not be happy with the value of your investment, but you will still own 1,000 shares of Amazon. Why on earth would you dump it? You have witnessed firsthand what that stock can do. Do not panic and “sell while you still can.” Whether you are in a specific stock, or diversified portfolio spread across thousands of stocks (via funds), the concept is the same: you still own those specific shares.
In my mind, selling stocks while they are down, is the same as selling your home because its value dropped. If your home value drops, are you going to sell your home, go rent a place, and buy again once prices go back up? Of course not! Yet, people try this all the time when the stock market is down.
Some people incorrectly view the stock market as gambling. If it starts dropping, they think it is only a matter of time before they lose it all. Proper stock market investing is the literal, statistical, opposite of gambling. It is a fact when you gamble in Vegas, the longer you are in the casino, the more likely you will lose your money. This is because the house has the better odds and why, in a casino, everything is designed to keep you in your seat.
In a properly diversified, long-hold strategy market portfolio, the longer you invest, the more certain you are of a gain. For the record, I am not talking about a minimum of 20 or 30 years. The fact is, there are far more positive years in the markets than negative. For example, since the inception of the S&P 500 Index in 1957, there have been 17 negative years in the market, 1 zero, and 47 positives. That is a positive to negative ratio of 2.76:1. In other words, for every negative year, there are almost three positive years!
When you see the resilient and impressive nature of the stock market, it is easy to realize you should hold on to those assets and be greedy over them. Do not sell them to someone else for less than you paid.
Take Advantage of Downside Strategies
Let’s talk about smart strategies you should be employing RIGHT NOW.
As your advisory team, we automatically deploy certain strategies for you. One strategy that we use, we will have started years before clients even retire. If you are retired and utilizing your investments for income generation, we have kept you in a healthy amount of bonds or other fixed income assets to protect your income. The right kinds of bonds will help offset the volatility of stocks and, more importantly, give you a place to pull income from during negative stock periods. This is a perfect example of not selling stocks or stock funds while they are down.
Starting in January this year, we changed our client’s income distributions to primarily pull from fixed income investments like bonds. We will continue to do that until stocks recover. This is a crucial step to protect your stock market assets. That is our part. Your part is to avoid unnecessary large withdrawals or panic selling.
In June of 2021, we felt the Fed was being too soft on inflation and not properly increasing interest rates. We figured procrastinating interest rate increases would mean they would have to get more aggressive later. Unfortunately, we were right. Fortunately, in June we started moving into short duration and other bond positions that are more defensive to inflation and rising rates.
Also, in January of this year, we moved a few aggressive stock funds into more conservative/defensive positions. Although none of these were drastic steps like selling into cash, they have and will likely continue to make a significant difference over time. More often than not, making huge swings in and out of the market is more detrimental than market drops. You are not psychic, so do not try to be with market movements. Simply riding through the storm, holding firm to strategies, and exercising diligence is the tougher but better approach. In short, we do not make drastic, bold moves, in and out of the market; however, we do actively adjust our models within certain reason and strategy.
The next smart strategy to employ during this time is to BUY, BUY, BUY. Stocks are on sale right now. Be greedy and gobble them up. We always insist you keep proper cash reserves and emergency savings. Beyond that, if you have excessive liquid funds, now would be a smart time to buy. If you are pre-retirement, keep up your 401(k) or IRA contributions. Better yet, increase your contributions. Be greedy.
If you are retired, not contributing, or can’t afford to contribute any more, do not worry. Your investments are buying on the dips for you. What I mean by this is that you have many investment positions still paying dividends. Despite their stock prices being down, many companies are still profitable and paying shareholders dividends.
Take a look at your monthly statements so far this year. You will see many line-item transactions for varying dollar amounts of dividends paying into your account. We typically have these dividends set to reinvest automatically. This means if “X” mutual fund pays you a $100 dividend, it automatically buys for you $100 more of that same fund.
This is what we call compounding dividends, and it is massively powerful. In this scenario, not only do you have the same number of shares before the dip began, but you also gain more if you reinvest dividends. This will act as a compounding growth factor as things recover. Congratulations, you were greedy and gained more shares while prices were down.
I urge you to stay invested. Do not panic when things decline. Market dips are temporary, they always have been and always will be, perhaps until the world ends. Hopefully if that ever happens, you and I are onto bigger, better things! In all seriousness, in the markets and life, those who remain optimistic, stay diligent, and follow a plan fare far better than those who are pessimistic and panic.