I used this phrase when I was a financial advisor during the market correction of 2008. Clients would call in a panic wanting to get rid of good quality investments which is like “throwing the baby out with the bathwater”. I would ask them; are you going to stop buying groceries, turn off all your utilities and hold off buying medicine? Their answer; “Well no”. I reminded them, even defensive sectors like consumer staples, utilities and health care will fall in price when fear hits the markets.
In my three-part series on Investment Ideas for 2015, I mentioned that investment fear is creeping back into the stock market. The first few trading days in 2015 have been very volatile. The black line is the S & P 500, the three lines above it are the spider ETF’s for health care (xlv), consumer stapes (xlp) and utilities (xlu). The worse performing sector is of course the oil ETF (xle). I still believe that 2015 is going to be very unpredictable. I am not suggesting that you try to time the market.
Fear makes no sense, investors are willing to accept 1.95 % interest for ten years and lose a bundle if rates go back up. I understand that money flows to safety and the U.S. dollar is considered the best place to be. Especially, when the other major currencies are trying to devaluate. However, the math on the yield of the 10 year U.S. bond doesn’t work for long-term investment returns when inflation will negate the interest payments. I would rather raise some cash and buy some bargains.
One way that I take advantage of fear is a systematic investment plan. I have used this method before and it has boosted my investment returns. For example: if after doing some research I wanted to buy the financial sector and decided on the spider ETF(xlf). Using charts of XLF, I would invest 25% of my available funds at a time. The one year chart below has the 50 & 200 day moving average, I would buy 25% of my position every time the XLE hit the 200 day moving average. If the correction was worse than I thought, I would hold off buying until the price chart moved above the 200 day moving average. It is a simple method of protecting your capital from large losses during in times of great fear. It also allows you to buy part of your position in a sector at bargain prices
On the other hand, the one year chart of the spider oil ETF (xle) hasn’t made a bottom and is trading below the 50 & 200 day moving averages. I am in no rush to invest in this sector.
Hedge fund managers love to gamble on trying “to catch a falling knife” because it isn’t their money. If they are right, they can go on T.V. and tell investors how they bought at the bottom boosting their returns. These are the same managers that were on T.V. in the spring of 2014 predicting a rise in U.S. interest rates because the U.S. Fed was stopping Q.E. later in the year. The rise in interest rates never happened and they lost a bundle shorting the stock market.
The 10 year chart below is the S & P 500 and it shows that it took 3 years for the market to recover after the 2008-2009 correction. Remember Rule No. 1 Don’t lose money!
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch
I have been investing for over thirty years but I am overly cautious. Being in my early 60’s, I can’t afford to jeopardize my retirement nest egg. Sometimes I wish that I could go back in time to my 30’s, knowing what I know today. My nest egg would have been so much bigger.