Is It Time To Freak Out And Sell Or Time To Buy The Dip?August 10 | Posted by Matthew Clark | Inside Trader Highlights
If you’ve been contemplating whether or not you should join the “global sell off band wagon” and start offloading investments in your portfolio, let me reassure you that now is NOT the time to do that. Quite often when investors try timing the markets or begin panic selling, it’s too late and they end up selling for a massive loss just before the markets rebound. Take what has happened over the last week. The markets plunged due the S&P downgrading the United States from AAA to AA+. All three major indices (DJI, Nasdaq, S&P500) fell by nearly 14-18 percent. Now before you freak out and head to your trading account for relief, let’s put this into perspective. The markets crashed because of news we already knew was coming. The US is in serious financial trouble (surprise, surprise). Like we didn’t already know that. Big deal! It’ll blow over as it did in 2008, 2001, 1987, and the list of economic disasters that sent the markets spiraling down just before they rallied on to new highs goes on. Oh and stop believing them when they say “this time is different”. We’ve heard that every single market correction, and guess what? It wasn’t really that different.
This is what the markets do. They have rallies and then they have corrections, and they will continue to do this for as long as investors are buying and selling stocks. Now the important thing to keep in mind here is that if you hold equity in solid blue chip companies with strong balance sheets and a sound business model, quite often their stock price will return to normal levels rather quickly. As a matter of fact, they will be some of the first company’s to rebound. Why? Because there is nothing fundamentally wrong with the company itself. They are simply victims of a global sell off. Think about this for a minute. People will still stop at McDonalds on their lunch break for a big mac, they will still need to put gas in their car (Exxon Mobil), they will still need to talk to their friends and family (cell phone carriers), they will still buy groceries (Whole Foods, Supervalue), and they will still stop by Starbucks on their way to work for their favorite Vente Latte. The point is that life goes on even during a recession, and as consumers continue to go about their daily routine, company’s will benefit and stock prices will return to normal levels.
Warren Buffet said it best: “Be fearful when others are greedy, and be greedy when others are fearful”. We couldn’t agree more with Mr. Buffet. Now is the the PERFECT time to buy into the markets. Stocks are extremely cheap and present great investment opportunities. How do you think the financial institutions made their millions all of these years? They bought in when the entire world was on sale. They’re not stupid. They buy when the rest of the world panics knowing well that the markets will absolutely return to normal levels at some point in time. And when this happens, they will have a front row ticket to the moon as the markets once again slingshot ahead.
If you take advantage of the dip instead of freaking out with the rest of the world, guess what’s going to happen when the markets finally start to rally again? Yes, that’s right, your portfolio will skyrocket pushed up by other investors who got in too late or who tried to time the market (shame on them)! This is why it is important to ALWAYS keep a portion of your portfolio in cash. This way, when great opportunities come along like the ones we are experiencing today, you have money on the sidelines ready to put in play.
The markets have a 100% success record of returning to new highs after a major correction, most of which occur within 3-5 years. And as history tends to repeat itself, we can pretty much assume the same thing will happen here