Why You Shouldn’t Lose Your Head In This Market
It’s official: we’re in correction territory.
A correction is officially defined as when a stock or index declines by 10% or more. If we get a 20% dip, then it’s a full-blown bear market.
There are a couple of culprits for the rocky start to 2016, but it essentially boils down to two things: 1) China is a mess — something we’ve touched on repeatedly here at StreetAuthority (see: this and this); 2) Oil prices continue to plummet (more on that in today’s issue).
The current correction looks remarkably similar to the one we experienced last August. That was also largely blamed on the same two factors: China and oil.
As you can see in the chart above, the last time we saw a market correction, things eventually simmered down and share prices recovered.
Whether recent history repeats itself is anybody’s guess.
I know that may sound disconcerting to some of you. But I don’t believe in making hunches or predictions in order to mollify nervous readers. That’s simply not our style. Our job is to help make you a better investor and identify what we think are some of the best opportunities to profit along the way.
#-ad_banner-#So what should you do?
For starters, after you’re done with today’s essay, go back and read this excellent piece in Barron’s. It sums up a few key ideas that I’m going to touch on today.
Here’s what we do know…
We know that a 10% correction sounds like a lot. And it is. But this sort of event is well within the parameters of a functioning stock market.
As proof, the Barron’s article I mentioned cites a column by Barry Ritholz in The Washington Post with an interesting tidbit:
| Between 1950 and 2014, half of all annual periods saw a correction of 10% or worse,” he writes. “From the August highs to Friday, U.S. markets are down (surprise!) about 10%. Don’t be surprised if in two, four and six years from now, those markets also see a 10 to 20% correction. |
My point is this: a correction is neither rare nor a reason to panic. If you can’t shoulder a 10% pullback in some of your positions, then you need to be rethinking your idea of risk tolerance altogether. That may sound harsh, but just know that this too shall pass.
So if a correction isn’t rare, and it’s no reason to panic, then does that mean it’s time to buy on the dip? Hardly.
Individual investors are terrible at timing the market. Reams of data back this fact up. Hell, even Wall Street is bad at forecasting the market.
As proof, the Barron’s article cites the research firm Bespoke Investment Group — one of my personal favorites.
| Since 2000, it found, the consensus has called for an average yearly increase in the S&P 500 of about 9.5%.The actual average annual change was less than 4%, however, and consensus predictions were inaccurate in every single year, sometimes by preposterous margins. In 2001, for example, the consensus called for a gain of 20.7%. But the index fell by 13%. In the horrible year of 2008, the consensus was that the market would rise 11.1%. As many investors may recall, it fell by 38.5%. Not once since 2000 has Wall Street predicted that the market would decline in a calendar year. Yet the market actually fell in five of those years. |
So when I tell you it’s anybody’s guess as to what the market will do this year, it isn’t a cop-out. It’s the truth.
Keep Calm And Carry On…
Look, the only thing I can tell you with absolute certainty is that we’re in tricky territory for investors who want to try and time the market. It’s tempting to think: “Hey, the market is in a correction… I bet I can scoop up some really good stocks for cheap. Everything’s on sale!” But you’re just as likely to be wrong as right.
Bottom line, don’t let the pullback be the overriding reason you put new money to work right now. Just don’t do it. Such exercises usually end up being a fool’s errand. I don’t mean to sound pessimistic, but whatever you do, don’t let your emotions override your judgement.
We’re just as likely to see further downside from here as we are to see the market snap back. We could even experience a full-blown bear market. If that happens and the prices on stocks become ridiculously cheap, then we’ll talk about raiding the cookie jar to buy stocks.
In the meantime, the best course of action is to stick to your plan (provided it’s working well for you). Having a proven system on your side helps, too, which is why my colleagues over at Profitable Trading have decided to reopen access to their report on the Top Trades For 2016.
These trades were all found by a unique buy and sell indicator that finds stocks right before they soar — and sells them before they begin to drop. It’s one of the single most important tools an investor can have at their disposal during times like these. It takes the emotion out of the equation. All you have to do is remain disciplined and stick to the system.
Our colleagues at Profitable Trading have been using it for a few years, and it’s tagged over 100 stocks right before they moved higher. In fact, for two years in a row, it’s spotted several of the best-performing stocks of the year… stocks that went on to soar as high as 242%. I can’t guarantee these 10 picks will be as successful as previous ones. But I would highly recommend you take a few minutes to at least look at this list of top picks while you still have a chance.