I’m going to get right to the point.
Do. Not. Panic.
I’m serious. Don’t do it. You’ll just be doing yourself a disservice otherwise.
Yes, I know the markets closed out July on a bad note. I know they opened August on more of the same. And I’m well aware the red poured freely yesterday, too.
I’m also quite confident that we’re headed into a recession. Whether it’s that garden-variety downturn I was hoping for or not?
At this point, that’s up for grabs, right up there with so many other pertinent questions.
For instance, did the Federal Reserve wait too long to cut rates? Maybe it did. Maybe it didn’t.
Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School, definitely thinks Jerome Powell and company messed things up, though. He told CNBC’s Squawk Box yesterday that, “The Fed funds rate right now should be somewhere between 3.5% and 4%” instead of the 5.25%-5.5% it’s been at for the past year.
With inflation down 90% toward the central bank’s 2% target and unemployment at 4.3%, surpassing its goal of 4.2%, Siegel says it “makes absolutely no sense whatsoever” to keep rates where they are.
So, will the Fed cut rates before September? That might very well happen. In fact, I think it’s more likely than not at this point.
But again, we just don’t know for sure.
What we do know is that the markets are not happy. They’re processing last week’s data and seeing nothing but negative outcomes from here.
Negative, negative, horrible outcomes.
You, however, don’t have to be so apocalyptic in your thinking. I actually highly recommend that you don’t for three solid reasons that could save you a whole lot of pain in the months… years… and decades to come.
If You Don’t Want to Make a “Bad” Situation Worse
Here’s reason No. 1 to heed my advice: Panicking only makes things worse.
When you panic, logic goes out the window. Historical data, current analysis, future indications: They lose all influence on you when you give way to fear, leaving you at the mercy of emotions alone.
As I’ve said before, emotions aren’t bad in and of themselves. In fact, they can be very good things, motivating you to accomplish great things in your personal and professional life alike.
You just have to know how to handle them instead of letting them run the show.
Because when investors don’t temper their feelings with a good grasp of the past and present to help them reach logical future expectations, their finances suffer.
If you want a guarantee in life, that’s about as good as you’re going to get.
Morgan Stanley backs me on this with its recent “Top 5 Mistakes Investors Make in Volatile Markets.” A hypothetical person, it notes, who “stayed invested from 1980 until the end of March 2024” would boast an average 12% annual return.
The big bank then contrasts that with “someone who started at the same time but sold after downturns.” If he waited for two consecutive years of positive returns each time before getting back in, he’d have a 10% annual return instead.
“That may not sound like a huge difference,” it continues. “But if each investor contributed $5,000 a year, the buy-and-hold investor would have $5.3 million now.” Whereas “the waffler would have $3.1 million.”
I need to add how that’s an overall market view. Too many individual investors with their individual holdings end up with no gains at all from this kind of behavior.
They buy in when prices are already over-elevated and then panic-sell at a loss once sentiment turns negative.
It’s a recipe for disaster that I and my colleagues here at Wide Moat Research have experienced for ourselves before we learned our lessons. And it’s something we work hard to protect our readers from today.
The Very Good Reasons Not to Panic Continue
Here’s reason No. 2.
Market drops happen. It’s part of investing life, which means you have to learn how to handle them – without panicking.
One way to keep calm is to recognize that it’s healthy for the markets to take some tumbles. Otherwise, it’s a sign of a bigger crash coming.
(Which, admittedly, some stocks might be in for considering how overenthusiastic their valuations got.)
The world is far too complicated for any stock – much less a large group of them – to go up in a straight or even semi-straight line. There are just too many factors at play:
- Competing businesses
- Legalities
- Press coverage
- Public perception
- Area-specific, national, and global economics
- Geo-political considerations
Even the best management teams can’t constantly control that list. What they can do is navigate their companies through them in ways that either maintain their healthy positions or, better yet, actually expand them.
In which case, you want to hold companies with the best management teams. Which leads me to my third and final reason for keeping your head in the midst of market volatility…
Drops like the ones we’re seeing open up prime stock-buying opportunities. I’m talking about really great prices for businesses that are well-placed to recover. And then some.
Benjamin Graham, the father of value investing and Warren Buffett’s mentor, once wrote that, “In the short run, the market is a voting machine. But in the long run, it is a weighing machine.”
To put it another way, unchecked emotions like fear and greed might run day-to-day share prices. But fundamentals win out in the end.
If a company is run by quality executives who maintain quality positions in markets that matter… it has a very good chance of seeing its share price rise over time. Despite occasional dips and even plunges due to the not-always-controllable factors I listed above, these businesses ultimately decide their course.
This rule doesn’t hold true 100% of the time, mind you. That’s why you need to be diversified in the companies, sectors, and segments you hold.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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Source: Wide Moat Research