On thursday by 2.48 pm, Dow had dropped 998 points, its largest intraday drop in history!
No one knows what caused it. Was it a computer glitch? Human error? Goldman Sachs? While they are still figuring out who is to blame, the investors got spooked.
The Dow recovered briefly but the next day witnessed a massive sell off.
Fight or flight response
When markets take a plunge, people react in different ways. The most common reaction is to follow the herd and cut losses. Some prefer to shut their eyes and ears to the market and their portfolio and do nothing. The expression ‘deer caught in headlights’ is most apt here. It takes a very rare individual to remain calm and treat this as an opportunity rather than a setback.
‘Be greedy when others are fearful, fearful when others are greedy’
A wise old man from Omaha uttered these words. Right now investors are fearful. And this presents some unique opportunities.
Should I sell?
Each investors risk tolerance is different and there are no universal rules. But in general, selling now wouldn’t be very prudent. There is only one rule to making money in the stock market. Buy low, sell high.
If you have unrealized gains even after the market drop, selling now would mean missing out on greater profits on a sunny day. But again, each individual’s position is unique. You are the best judge here. Give it good thought and don’t make hasty decisions.
You don’t want to hear about your portfolio. You prefer to sit through this. This is probably better than selling and if you are a long time investor, this blip shouldn’t derail anything. But, you may be missing out on some good bargains. It is like there is a sale going on and you aren’t doing anything about it.
The investor with a plan
If you are one of those rare breed of investors who actually have an investment plan with properly allocated assets, then the best thing you can do now is to rebalance. Focus more on the buying portion of the pie rather than the selling portion, if you have the cash.
The opportunistic investor
If you’ve built up a watch list of shares you’d like to buy when the price is right, re-evaluate those shares. Apple, the darling of NASDAQ was riding at $270 a few weeks back. Now it is for the taking at $235. That is just one example. Sure there is a possibility that the markets could fall further. Or investors might shrug this as a computer glitch and be back in business fueling the markets once again. The fact is both outcomes are possible and no one can time it to buy at the perfect time. If you are buying now, you are better off than had you bought it a few weeks back. That is your consolation.
The opportunistic but cautious investor
The possibility that stocks could fall further is real. If it falls real fast, you may not buy anything waiting for it to go up. When it does go up, you’d have missed the opportunity to buy before it had gotten too hot. Sounds familiar? One of the perils of trying to accurately time the market.
I gave AAPL as an example. But technology stocks, when they fall, they fall real fast. They are very volatile. If you buy today and the shares are at 200 a week from now, unless you’ve achieved nirvana, you may be kicking yourself. Though if you are buying the stock on Apple’s fundamentals and as a long term strategy, this shouldn’t matter. But then each investor is different. Here’s one strategy that might suit most.
Instead of going for the hottest and sexiest stocks, take a look at old, stable, boring stocks with an added bonus – stocks that pay out dividends. Even if you panic and move your assets to a bank, you might get a paltry 0.50% interest. What if you invested in good companies that paid out say 6% interest? If the stock prices fall further, you at least won’t feel as bad had you bought a non dividend paying stock! (In case you haven’t heard, dividends are not guaranteed – due diligence must!)
I’m a cautious investor, what should I invest in?
I hate giving generalized advice! There are tons of good companies that are on sale right now, but before you take the plunge, here’s what your main goal should be. Invest for the long term. Be prepared for the fact that the prices could fall further. But old boring companies don’t fall as fast as hot sexy ones. That’s the good news, but they could fall nevertheless.
Here’s just one example. AT&T. They have a good business model. They have a monopoly on the iPhone market. They know the business better than anyone else. Not too many competitors. The stock prices are at an all time low, they are actually at a 10 year low! They pay a healthy dividend of $1.68 per share yielding about 6.7%.
That’s just one example. There are many more. Walmart is another. AT&T is food for thought.
Be happy and prosperous!