Lots of bad news floating around, do note this time of high volatility will pass. Keep calm and do note do anything rash to harm your long term portfolio. Keep your eyes open ready for buys.
Realize the market, which is down about 10% this year, could fall much more (a 20% fall is pretty common; more than that is less common). Get comfortable with that, and remember how quickly it can change direction, too. What we've experienced over the past month is not abnormal, and it does not come close to shaking our faith in long-term investing. The kind of month we've just experienced in the stock market is something that, on average, occurs about once every two and a half years. Most investors are -- and all investors should be -- investing for a goal that is more than two and a half years away. Which is to say: This is the kind of thing a long-term investor should expect to occur from time to time.
The history of the stock market makes two points clear:
- Volatility is normal.
- Waiting it out pays off.
Don't despair. Remember you don't intend to cash out and use your money now anyway. It is invested for at least the next rolling three years.
Regarding the economy: I think people are over-reacting to oil and China concerns, but it is a shock to see oil below $30, and now people are thinking interest rates won't go up as much this year as they might have otherwise, and that hits financials. People are adjusting expectations and trying to determine what $30 oil means (shockingly, it hasn't helped AAL or airline stocks at all). For most consumers, it's good (not for those working in energy who may lose their jobs). For energy businesses, it's potentially awful. But either way, it's a shock and selling in reaction to it is not too surprising. I do think rampantly selling down companies that have nothing to do with energy or China's economy shows you that the market is not rational (as we already knew). We should eventually see opportunity that we want to act on in this extreme volatility, while knowing it won't last.
Either way, you should be investing just as you always do: with a three-year or longer outlook; with money that is yours, in positions you believe in; and while maintaining flexibility in your portfolio. Over history, sharp declines have always been opportunities. It's extremely likely this drop will be one, too. That's why it's so important that you never over-leverage yourself, which could take you out of the market at the worst time. Don't ever borrow money to invest. Make sure you are building a portfolio that's here to stay, even if it moves down with the market.
This warning is even more important with options, which are leveraging tools. As we always, always say: Don't write more put options than you can cover with your cash. And only write puts on stocks that you're ready and happy to buy. As ever, use options strategically as a complement to your stock portfolio. The Nasdaq is down about 11% year-to-date, and the S&P 500 nearly 9%. But declines of 20% are common, be prepared for a greater fall, just in case.
People like to ask me, so what are you doing now? Right now, my hedge is working pretty well. I'm also looking for new opportunities, Fyi, China PE ratio stands at a 6!!!!!! That is a fking bargain. I'm really not sure how much lower can this giant economy go, but I'm pretty sure if I park my $$ there, a 10 year outlook looks almost guaranteed good returns. Do look at ETFs tracking the China markets like FXI and ASHR.