Investing during a period of corrections: How to stay cool amid the panic
Sensible investing is an incredible mechanism to accumulate wealth over time, but it doesn’t come without risk. Volatility is the price we have to pay. And patience is the game we must embrace.
Easy to say, hard to achieve. Even though I have close to 25 years of investing experience, the last few months have even tested my conviction on several occasions. This is definitely one of the most brutal asset price corrections in the last 20 years.
There has been no safety ground, with equities, bonds and anything speculative like cryptocurrencies all suffering drops. How does this all end? And what should we do in the meantime?
I wish I had clear answers to these questions. If I did I would gladly share them with you. The truth is I don’t know for sure, but history does have some important milestones for us to consider.
Since March 2009 (the stock market low following the financial crisis of 2008), the S&P500 which is the broad gauge of US publicly listed companies is up 600 percent. But during this time there have been 30 dips of more than 5 percent, 9 drops of more than 10 percent, 3 corrections of more than 20 percent and 1 collapse of more than 30 percent (March 2020 COVID-19 panic).
So corrections are part of the process by which financial markets continually re-adjust to the risk and rewards it sees in front of it.
We are clearly in a risk-on mode. Central banks across much of the world have to battle high inflation. The key tool they have to do this is to raise interest rates.
The dual combo of high inflation and rising interest rates raises fears of less money in our wallets to spend and also a lower purchasing power of that money.
Or in other words we have less available to spend and even that which we buy costs more. This could all end up in a recession which is bad for profits and sentiment.
No wonder financial markets have been spooked. I think it is fair to suggest that we should expect more wild swings until the US Central Bank’s (the Fed) struggle to beat inflation has been resolved.
But there are also rewards we can look forward to. The re-adjustment by financial markets means many good companies now have their bonds and equities priced on the cheap. And this is where some form of investment discipline can help.
To use Warren Buffet’s famous example, if an item you wanted to buy yesterday is now 30 percent cheaper today, you would probably look to buy it without hesitation. So the same concept can apply to good financial assets. I use the word ‘good’ because it is important in such an economic environment to separate investing from speculating.
Buying the bonds or shares of a company which is indispensable to modern day living (like Microsoft for example) makes sense to me. But buying shares of a company or crypto coin which really doesn’t not have an established use case doesn’t mean it won’t fall further.
Just because something has fallen 70 percent doesn’t mean it can’t fall another 70 percent if it is either still expensive or has no legitimate customer base.
At times like this, it pays to sometimes also take a step back and see the bigger picture. In my mind, the bigger picture is that the majority of 7 billion people still wake up every morning looking to be productive and create/contribute towards to economic activity.
This force will surely, as it has on all previous occasions, eventually lead to the end of selling and the start of a fresh growth cycle. I see no reason why growth, economic optimism and progress will not return. My guess is it will do so sooner than we expect currently.
But even if it takes longer than we would want, good assets selling at cheap prices are never a bad investment.
I still believe sensible investing is an incredible mechanism to accumulate wealth over time, but it doesn’t come without risk. Volatility is the price we have to pay. And patience is the game we must embrace. Stay cool amid the panic.