IKEA makes great commercials! My favourite is where the middle-aged couple are running out the exit with their goods, while the lady is yelling to her husband “get the car, get the car!” She’s gotten such a good deal at IKEA she is just beside herself with frenzy, because she can’t believe it’s true.
Investors also realize the stock market is a bargain, after two days of massive declines. They are also bargain hunting with frenzy. And that’s a good thing. Other investors may be frozen in fear, or even worse selling their equities. It’s the smart ones who swoop like vultures to buy discounted stocks on dips and corrections. So many investors are “backing up the truck” so to speak, to buy cheap stocks and equities on sale. If I had the capital I certainly would be as well. In fact, it’s the first time in my life I’ve seen a group of grown men, talk about shopping with such enthusiasm!
We’re Not Out of the Woods Yet
But should you buy everything now, after only two days of sudden declines? Or just invest half now and wait for more bargains? Is the market just blowing off some steam, or are we in for another big decline? Who knows, I really have no idea, but don’t be in a rush to spend all of your money just yet. There still may be more opportunity, and we may not be “out of the woods“. With Standard Poor’s unprecedented downgrade of the U.S. credit rating to AA-plus, there is still uncharted territory in the days and weeks to follow.
What the Past Tells Us
The past tells us that sudden market declines of only a few days are seldom followed by raging bull markets. That isn’t always true, and as we know markets turn very quickly, and are unpredictable (like last week). But what we do know is “the trend is your friend”. In other words if there is a change in the trend, or the trend indicates a market direction, then it’s a decent indicator. In fact the TSX Composite Index has actually been in a down trend since May 2011, as indicated by the 50 Day moving average (see TSX chart to right). I also used this chart in my previous post Keep Calm and Steady.
Back on September 15th 2008, after the infamous collapse of Lehman Brothers, The TSX tumbled some 515 points, or -4.2%% to close at 12,254 points. (Do those support levels sound familiar?). While October 2008 presented another great buying opportunity, as the TSX tumbled another -26%, it didn’t stop there. Markets continued to collapse another -16% in only a few months, the TSX plummeting to 7,591 on March 2nd, 2009. Had you left some cash on the table, and weren’t too shell-shocked, like most of us were, you could have bought even more equities on sale in early 2009. But if you spent all your money, you would have had to sell a large chunk of your bonds, or borrow to get more capital. In other words, there were plenty of opportunities to buy into the market over a 5 month period.
To a degree, the same was also true back in the Market Crash of 1987, the dot com bust of 2000-2002, the 1973-1974 stock market crash, and of course the infamous crash of 1929, among others. You don’t really need to be in a big rush to buy, there is always time to move in. I’m not saying don’t buy equities now, far from it. I think it’s very prudent to be buying some now – just don’t spend everything. There may be more declines and opportunity to come.
Is Your Asset Allocation in Check?
One thing I do know for sure is I have a nice income generating and balanced portfolio which is priceless when stock prices go down. I could have easily gone with a 100% dividend portfolio in 2009, but I didn’t, I saw how bonds gave me a cushion and income through the decade. And to be honest I just didn’t have the guts to go 100% equities – that takes a lot of fortitude.
While my returns were not outstanding this year, it looks like my balanced and diversified approach has paid off. My entire portfolio is only showing a slight negative return for the year. It could have been a lot worse, but it isn’t. The reason of course is dividends and distributions, and a cushion of bonds.
Before you go buying up stocks left right and center, does your asset allocation include bonds? And if it does, ask yourself, are you in check with your asset allocation? If there are still more declines to come, you don’t want to be giving up on your bonds, or putting all your cash on the table with stocks.
Where Do We Go From Here?
I think that’s a really good question, and anybody who thinks they have the answer is either pure genius or bluffing. If you have cash then don’t go spending it all just yet, and “backing up the truck” too quickly. We may not be entirely “out of the woods”, especially with the U.S. credit rating downgrade on Friday. There are still a lot of debt concerns in Europe, and room for oil prices and other commodities to fall further. Of course, it’s always the unexpected that hits the markets – the one thing that nobody saw coming, and I doubt we have even seen that one yet. One thing is certain – next week is going to be very interesting.
Well here’s to a cold beer in summer, and a toast to markets on Monday 😉 Stay thirsty my friends!
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