You can’t pick up a single publication of any kind, or open an internet browser in the past several days, that doesn’t have some sort of “don’t worry” article about the stock market. In short, I apologize for unloading another such article your way. My net worth publication this month is going to take a serious hit. My investment portfolio consists of a two 401k’s, a 403b, a SEP IRA, and an after-tax brokerage account. To say that my savings and wealth are leveraged by the stock market would be an understatement. My savings and wealth ARE the stock market! The past 6 years have been a raging bull of a market and my net worth has benefited greatly from it. I mentioned in a previous article that I experienced a 23% return on my investments last year alone. That was significantly higher than the market even experienced, which is I am more susceptible than the average investor to the volatile swings in the market recently. Without getting into monetary specifics, I can say I definitely lost any and all gains this year, and a good portion from the latter half of last year.
So, do I regret not selling before the China meltdown? Sure am! But I’m also regretful that I haven’t yet picked the right lottery numbers to win the Mega Millions. Achieving either one with any level of certainty takes super powers that I don’t have. I’m sure there are plenty of people out there who saw the writing on the wall of China’s economy and sold their investments and bought into bonds…and are probably now buying back into the market at fire sale lows! While the move appears to be shrewd, it’s more akin to gambling. It’s not exactly the “bet it all on black” type of gambling that we have come to know and love, but if you choose to lock in your gains too early then you could miss out on potential gains going forward. This is especially true if you plan on jumping back into the market at some point. Who’s to say when the best time to get out and to get back in really is?
While I am a huge proponent of taking advantage of dollar cost averaging I do have a few minor exceptions that play into my investment strategy. For those of you not familiar, dollar cost averaging is a very simple concept. Basically, if you buy the same stocks with the same amount of money in a fixed period of time you should experience DCA. That means you will buy shares of a stock when the prices are higher, and sometimes when the prices are lower, but in the end you will accumulate capital gains on your overall stock portfolio over a long period of time. Think of Facebook. I bought into them immediately upon the launch of their IPO (initial public offering), and then watched the stock decrease over the next month. But as I bought more shares of Facebook over time my average cost of shares actually got lower, and overall the stock price appreciated above and beyond my initial purchase even. Fortunately, this is happened with just about every stock I have ever purchased, at least at some point or another. Now back to my minor exceptions! When I see irrational fear provoking wild swings in the stock market I usually like to take the opportunity to purchase more shares of stocks I already own. I already took advantage of this late last week, and plan on doing so again this week. Allow me to explain why…
How do I define irrational fear? When stock prices decline due to factors other than their reported earnings and overall financial health. I’ve always stuck by the theory that a stock should trade based on a reasonable price/earnings ratio and other key financial indicators. Everything else is really just speculation and beliefs, and not facts! For example, consider that the US automotive companies are reporting records earnings each quarter, have healthy balance sheets, and are approaching a record sales year. Furthermore, their P/E ratios are so low that in order for them to experience a “correction” they should be going UP not DOWN! However, a massive slump in the Chinese economy has caused a panic to everyone who sells any product there…forget the fact that those sales are in the single digit percentage piece of the overall sales pie. While one of the auto companies might be a bit more leveraged by their sales in China over the others, you are still talking about some healthy companies turning ridiculous profits globally. Apple is another great example. Forget that they are the undisputed #1 innovator of technology in the world, that they break records each year when it comes to selling phones, tablets, and computers. Also, give no thought to their future desires to control every point-of-sale transaction as well as driverless cars. Instead, just think about the amount of phones they sell to China each year, call them overexposed, and violently sell off every share of Apple stock you own at a ridiculously low price! See my point?
If you are currently in the stock market, don’t get out. If you are currently on the sidelines, then jump in. I’m counting this drop in the market a “sales on stocks” and not a “correction”. I’m still willing to bet a correction is coming, and perhaps a bit of one is mixed in right now, but we aren’t seeing stocks trading based on earnings and financials, we are currently seeing them trade on fear and lack of knowledge.