Advertisement

How to take advantage of falling markets

With markets as volatile as they are now, it’s difficult to know what to do. But don’t panic, says John Stepek. Sit tight and stick to your plan.

180212-markets-b
US stocks are still overpriced

© 2018 Bloomberg Finance LP

Is that it?

The US market managed to rebound on Friday after a fraught session stuffed with highs and lows. By the end of play, the S&P 500 closed up 1.5% for the day, and the Dow Jones and Nasdaq both managed 1.4%.

Have we seen the bottom for this panic? Or the top of the market for this cycle?

Advertisement - Article continues below

Here's the honest answer it doesn't matter...

The US market is still expensive don't waste time worrying about anything else

If you're fretting over the gyrations in the US market, here's a calming word: don't.

It doesn't matter if the US market has hit the top or not. It really doesn't.

Don't get me wrong. From a curiosity point of view, I'm interested to see if we have actually seen the top already, and if this is just a rebound before another dip lower.

Opinion seems divided among various commentators whose views I respect, but it rather boils down to "was that the parabolic move (or market blow-off top' or melt-up') that we've been waiting for? Or is there a bigger one to come?"

In other words, the consensus is actually pretty clear: we're in the end game. The only real question is: have we seen the top already, or is there one last blast of mania left in the market?

Advertisement
Advertisement - Article continues below

For what it's worth, my gut feeling is that there's one last blast. But that could easily be wrong. Depending on economic data and Federal Reserve comments from here say inflation figures let up for a little while, or the Fed hints at being careful with further interest rate rises we could easily see a new spurt of enthusiasm for stocks.

Advertisement - Article continues below

And as I pointed out on Thursday last week, stockmarkets can be impressively slow on the uptake.

But in any case, from a practical point of view, it's not that relevant.

One thing that we already know about the US market is that it is still very expensive. So should last week's 5% drop change our minds about the US market, if we'd already decided to avoid it because it's expensive? The answer, clearly, is "no". This particular drop doesn't change anything.

At some point, the market as a whole will be cheap enough to be considered a "buy" again. But we're not there yet.

You have a plan, don't you?

So what does that mean for your portfolio?

The problem with times like these is that it makes you feel desperate to "do something". When the market moves a lot, you feel that there should be profits there to be had.

That's the danger of consuming too much financial news. These are short-term moves. You invest for the long term, and you make your money over the long term. When you act with short-term motivation in mind, you will almost certainly lose money.

Advertisement - Article continues below

"But if I buy the dip now, I can make a quick 10% on my money on the turnaround trade". Well, maybe. Or you could lose another 10% as you try to pick the exact right moment to get in.

Advertisement
Advertisement - Article continues below

And when you fail, you'll add more money to your trade, in order to get back to even. And when that fails too, you'll give up in disgust. Then the market will bounce back. And that will add rage to the emotional stewpot, and you'll end up making more stupid mistakes.

The point is, you should already have a plan. Does this fall in the market change anything about that plan?

Does it change the fact that given you have another 20 years until retirement, you broadly want most of your money to be in equities, and you've already picked out the cheapest markets or most attractive funds you could find?

Advertisement - Article continues below

Does it change the fact that you have ten high-quality stocks on your watchlist, and you've been waiting for the opportunity to buy them at a more advantageous price?

Today should not be the day that you are suddenly looking at your portfolio and wondering what everything is doing there. You shouldn't be waking up this morning and realising that the fund with the elaborate name that you can't quite remember buying was leveraged to the hilt in short Vix contracts and has now fallen in value by half.

Today should not be the day that you are looking at a stock for the first time, thinking "that's got a 7% dividend yield now", and pressing buy' because you are worried that the opportunity' will go past you.

Preparing yourself during the calm, dull days of the market will prevent you from making big mistakes and will allow you to take advantage of opportunities during the volatile, exciting days.

If you have your plan and you have your watchlist, you're fine. Sit tight and wait for prices to come to you.

And if you don't have a plan and you don't have a watchlist (assuming you're even that interested in being an active investor), then start working on one. And don't hit "buy" or "sell" until you've done it.

Remember the worst thing you can do in markets is destroy your capital by making unnecessary mistakes. So if you're feeling jittery and unprepared, take a deep breath, step away from the screen, and schedule some time to review your portfolio and do some research.

You don't have to do anything today. There is always a next time.

Advertisement
Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019
Visit/510135/trade-war-ceasefire-boosts-stockmarkets
Economy

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular

Visit/economy/uk-economy/601427/covid-bounce-back-loans-and-inflation
UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020
Visit/investments/commodities/601433/commodities-possibly-the-biggest-opportunity-in-todays-markets
Commodities

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020
Visit/economy/global-economy/601420/james-ferguson-the-virus-the-lockdown-and-what-comes-next
Global Economy

The MoneyWeek Podcast: James Ferguson on the virus, the lockdown, and what comes next

Merryn talks to MoneyWeek regular James Ferguson of Macrostrategy Partnership about what's happened so far with the virus; whether the lockdown was th…
28 May 2020