Well, we are now in correction territory, meaning that we are at least 10% percent below our recent market highs from just a few weeks ago. Looking back, it’s a little funny. Earlier this week I posted an article expressing my confusion with the markets. Everything, and I mean everything was on the up & up. Even JC Penney, although I’m almost certain that no one shops there. I had an eerie feeling, to say the least. Given how unpredictable schedules can get, I typically write my articles in advance and schedule the releases a few weeks out (or days out depending on how far behind I get) so that I can stay on track regardless of what life has in store. Anyway, that article was written earlier in January and scheduled for a much later release but I had to move it up due to the crazy day of market declines late last week and earlier this week. I didn’t want the article to become irrelevant. Fast forward a few days, and we’re seeing headlines like “Dow dives more than 1000 points despite attempts by Fed to calm investors,” Dow plunges 1033 points and sinks into correction,” and “Dow plunges more than 1000 points on specter of higher interest rates.” Some timing… Strangely enough, the big declines are somewhat settling, and a welcome change from the constant increases in share prices. If you’ve ever been on an elevator ride at an amusement park, you can relate. We’ve been waiting at the top for months wondering when the drop would happen, and now it’s here. Falling is easy, it’s the suspense that gets you. Of course, that is until it’s your net worth that’s falling, and to the tune of $10,000 in a single day, or about $20k over the last few weeks!
Why It’s a Good Thing
Despite watching a decent portion of my portfolio value fly out of the window (or not watching thanks to my broker’s outage a few days ago, likely overwhelmed by all the frightened investors looking to sell), this precipitous decline in the markets is actually a good thing, and I’ll explain why. In a few of the posts that I have written prior to this, I’ve made note of the fact that I am too exposed to equity markets. This has yielded amazing results over the last few years, but I knew that this couldn’t last forever, and the jig may finally be up. Even if not, this recent shift has seriously encouraged me to get going on my asset diversification strategy. Key among them, real estate. Yes, the new tax plan has made it less advantageous to own property, and sure it comes complete with a full suite of entirely new headaches all its own, but it provides a way to diversify. Had I taken $50,000, $75,000, or even $100,000 and invested it in a rental property or two, the effect this recent decline had on my finances would have been less dire.
The correction is also creating a great buying opportunity for savvy investors like you and I. If you want to build wealth, get comfortable doing the opposite of what everyone else is doing. The sage investor Warren Buffett once said: “Be fearful when others are greedy, and be greedy when others are fearful.” Declines like these are opportunities to employ this type of thinking. Fear is forcing people to sell off really good companies, that are profitable and have enough cash to weather any impending storm. A good example is Apple (disclaimer: I own shares of Apple), which is down about 10% over the last two weeks. Last I checked, they were still selling iPhones, and as of December 2017 had +$250 billion dollars in cash. For perspective, that’s more than the combined cash reserves of the UK and Canada and is larger than the total economic output of Finland and Jamaica, combined. In fact, if Apple were its own country, it would be the owner of the approximately the17th largest economy in the World. Crazy! Combined with loosened tax policies, I find it difficult to believe that Tim Cook and Co. in Cupertino couldn’t find a way through whatever comes next, even if they had to buy their way out of it. As an added bonus, Apple even pays a solid dividend. And it’s not only Apple that is being sold off. You can find shares of almost any company trading at a discount to where they traded just a few weeks ago. Happy hunting!
Finally, the recent market decline likely has had a calming effect on some of the more seasoned investors. I can’t tell you how many times I’ve heard older folks comment on just how uncommon the market run-up over the last few years has been. They’ve been afraid to contribute to 401ks and purchase stocks for fear that stock valuations have run up so much that they have to be headed for a cliff in the near future. Perhaps now we’ve fallen off the cliff and they’re ready to jump back in. Who knows, but overall, I think people are a little more comfortable making investments at current market levels than they were just a few weeks ago. Look at the chart below, and you’ll get a sense of just why people were so afraid to invest. No one wants to invest at a peak.
Here’s the chart again, without the NASDAQ, so that you can see the scale of the recent run-up in both the S&P 500 and the Dow Jones Industrial Average.
Why This is Happening
It’s always important to try to figure out what’s causing markets to behave the way they are. It doesn’t pay to be a passive player in this game. Taking a few minutes to figure why things are the way they are could lead to an insight that allows you to profit in a big way. Unfortunately, that isn’t the case here and I don’t have any secrets to share that will make you a millionaire overnight. What I can tell you is that the culprit this time seems to be the possibility of hyperinflation, caused by the Fed raising rates. Many investors believe that the stock market has overheated due to a long period of sustained low interest rates orchestrated by the Fed to help lift the economy out of the last recession. By keeping rates low, companies were able to borrow inexpensively, fund projects, and hire people – providing a needed boost to the economy. But with the economy operating on all cylinders, the Fed is planning to raise rates, and with it the cost of borrowing, albeit by a tiny amount. For some though, they see the writing on the wall, and increasingly higher rates seem just about certain. This is causing investors to sell off shares amid fears that company profits will decline as the economy slows. However, while rates are likely to increase, the sell-off is probably being overstated. Rates are rising because the economy is doing well, and is forecasted to continue doing so. This is just a case of too much good news, being bad news.
Fortunately, I’ve seen this before (remember the double-dip recession?), and the second worst single day in the history of the Dow hasn’t led me to hit the panic button – yet. In fact, I’m doing the opposite and doubling down. I’m viewing the correction as an opportunity to re-evaluate my portfolio and build more wealth by purchasing discounted shares of amazing, profitable companies. That said, now more than ever it’s important to track your finances closely, and Personal Capital is the best way to do so. You won’t find many free services that allow you to monitor and take control of your finances like Personal Capital does.
Are you hitting the panic button yet? Let us know how you’re coping with the recent declines in the comments below.