INVESTING
The Market’s Dropping & You Shouldn’t Care
(If you’re in it for the long term.)
Lately, there have been more red days than I like to see.
On its own, that’s neither here nor there. But against a backdrop of inflation and geopolitical turmoil and rapidly rising interest rates, it’s unsettling.
But here’s the good news: as far as your portfolio goes, you probably don’t need to worry. In fact, as a long-term investor, it might be time for some counterintuitive gratitude.
I’m not a financial professional. This is purely opinion and entertainment, not advice. Do what’s right for you, and if in doubt about what that is, then it’s important to find someone who’s legally able to tell you.
The dip is here
How often have you kicked yourself for not “buying the dip”?
Missed opportunities sting in hindsight, but your regret is for naught unless you seize the next dip. And we seem to be smack dab in the middle of one.
It’s not my place to tell you when or what to buy. It is, however, worth pointing out that if a well established business was appealing a few months ago, then it’s probably a better deal right now.
Some bright spots
What’s more, consider the red flags we’re not seeing. Namely, unemployment remains fairly low, and there are no signs of fraudulent mortgages collapsing under their dead weight.
What’s more, the most recent 0.50% federal rate hike (the largest since 2000) even sparked an uptick in most sectors of the S&P.
To be sure, other problems abound. But there’s just no sign of a once-in-a-generation macro collapse in the offing.
This research agrees
Several papers have highlighted the importance of staying invested during the shaky times.
Now, you might wonder, wouldn’t skipping the down days be even better than riding them out? Well, yes…but only if you could consistently see them coming.
In reality, hopeful market-timers tend to experience and react to the bad days, then sell or stop buying, and miss the ensuing good days. In other words, “studies show that people generally stop investing when the market is down, after an especially difficult downturn, and they return after the market has already begun to bounce back.”
Buying the dip may feel riskier than doing nothing, but for quality assets (including broad indices and ETFs), the real risk is remaining out once the rebound happens.
What assets make sense?
If your goal is long-run appreciation or compounding, then it’s always wise to focus on businesses with solid and growing cash flow, excellent dividend track records, and a relatively modest P/E ratio.
That’s especially true today. In fact, P/E ratios for many quality companies have just gotten a whole lot more modest. After all, that is the dip!
And if you share my opinion that we’re in for more tumultuous times ahead, then it’s all the more critical to screen for companies with durable advantages and a degree of pricing power around genuinely useful goods and services. In other words, the opposite of the firms hit hardest in the last couple months.
I’ve already shared some dividend stocks that are beating inflation thanks to good management and solid cash flow. They’re not specific recommendations, just examples to spark further ideas.
Selling out-of-the-money puts against these firms is also a great way to “juice” your returns, especially while high volatility is pushing option premiums up. I’d avoid margin and stick to cash-secured puts, but your risk tolerance may differ.
It’s OK not to worry
Past information doesn’t guarantee anything, but it gives us every reason to trust that things eventually trend up and to the right.
In the long run, market volatility is usually one of life’s lesser vicissitudes.
And also in the long run, as Keynes famously said, we are all dead.
It’s not my style to end on a dark note. My point is to emphasize the futility of spending our finite days fixated on the tumult du jour, whether financial or otherwise.
Accept the disquiet with equanimity, keep an eye peeled for the opportunity it bears, and if all else fails, step away from the screen.
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