The last week was probably not very good for most investors. President Trump started tweeting and everybody went gaga. Now, nobody knows what will happen and nobody really knows how markets will develop from here on.
The year 2018 was not supposed to be the year when everything comes down. It was supposed to be the super-nova of markets before everything comes down in 2019 and for most parts, it made sense to have this assumption. Stock market valuation in the US are hight but in Europe not that much and as long as politicians keep pumping money into markets, there is no reason for the rally to end too soon. I was expecting things to get blown up even more and then to watch this bubble burst after the next year-end rally.
But of course, this was before the President of the United States (POTUS) would start tweeting suggestions about a trade war and imposing tariffs on certain products, specifically steel and aluminum. Markets and politicians around the globe reacted with shock and within just a few hours announced “countermeasures” and “retaliation”.
It is mind-blowing. A real “wow” effect. When countries start a war or aggression in the middle east, Asia, Africa or wherever people die, usually all you get from our “developed” nations is a political statement that actions get “condemned” without any significant action. But when it comes down to money, markets, and trade, you get countermeasures even before anything happened!
But well, that’s the world we live in and for those who plan on retiring early, there might be some great opportunities ahead.
As you may have learned in school, the original idea of markets was based on the assumption of rational decision making. As you may have seen in the real world, markets are more than often anything but rational. Knowing this, every crash and every dip in the stock market offers great opportunities for quality focused investors. Why is that?
Well, even the best stocks like Google or Apple will go down when the whole market goes down. It doesn’t mean that the business of these companies suffers, but it means that they are not detached from market trends. Therefore investors with patience, time and a long term-horizon don’t worry about things getting ugly. They look out for opportunities and prepare to act on them.
How can we prepare for this scenario? First of all, there is no need to sell your stocks and there is no need to panic. The crash could come but it doesn’t have to. It could be that we will simply experience some higher ups and higher downs and after that, things might just get back to normal. Timing the market is almost impossible to even the best professional trader and if you plan on living from your investments later on, I truly wouldn’t sell anything that already offers a decent yield and has a history of surviving more than one market crash. What might make sense though is to stack up some cash.
Even if a market correction should set in next week, chances are that it will be a process the starts and holds on for 2-3 months before things start to turn around. Having some cash available may offer great opportunities during this time to either buy some stocks that you always wanted to have but which seemed too expensive OR to add stocks to your existing positions which would lower your average price of purchase and ignite the famous cost-leverage-effect. Reducing your average price of purchase will also result in increasing yield on your dividends.
As Warren Buffet, the greatest investor alive used to say: Be greedy when others are fearful. Market downturns are the time to be greedy.
Also, you need to remember that when a stock falls 50% in a market downturn, it will need to rise by 100% just to get back on track. Therefore lowering your entry price by adding stocks of the company that suffered during the downturn may significantly reduce the time it will take to recover the losses – and offer even greater profit opportunities later on.
Also, if you have some stocks that have already reached a specific target, you might want to sell them off in order to re-balance your portfolio and consider adjusting your investment strategy. For example, it may make sense to relocate some of your money into a Real Estate Investment Trust (REIT). Industry bonds are probably not recommendable for the moment as governments start to increase interest rates and money already started to shift from industry bonds to government bonds and securities. But REITs receive their cash flow and profits from tenants who pay rents. No matter what happens on the market, for most people, companies, and agencies who possess physical locations, they still need to pay rents. Therefore during market downturns, REITs are usually a pretty safe investment and offer great dividend yields on top.
We had almost a decade of a rising market and a correction must come sooner or later. How strong this correction will come up is to be seen and especially young and inexperienced investors might have a very hard time handling it. Many of them just don’t know and never experienced the feeling of losing a quarter or maybe even half or more of their entire savings over the events of a single night. The psychological and emotional effect can be devastating and make people literally jump in front of trains. Yes, this happened in the past and while I am not that old, I do remember the dot.com crisis back in 2007 and 2008. Being just a student, I lost my entire savings during that time which was a nightmare experience (even though the total amount of 2000 EUR would be rather negligible from today’s point of view) and the news was full of reports about people jumping down buildings.
In every event that involves parties with different interests, there are always winners and losers. Being prepared mentally and financially will reward the patient and rational investor in the long run. So, make sure to work on your strategy now, stack up some cash or re-balance your portfolio (or both) and enjoy a cup of tea while watching the spectacle develop. It will be an interesting one.