When Wall Street is on a roller-coaster ride, should you buy or sell? We break down your options.
If you’re like most investors, you’re likely to do one of two things when markets go haywire: sell your stocks or sit patiently and do nothing. Both strategies have serious drawbacks, but there’s an option few people consider – buying. As the investment world sifts through the wreckage caused by Brexit, volatility is likely to remain high. If you’re feeling anxious, why not turn your unease into opportunity and work with it to buy some great stocks at deep value prices? Before you pull the trigger, consider three key factors:
Time Horizon: How long do you plan on holding this position?
Consider the trade-off between holding for the long term versus the short term. Stocks are much more volatile and unpredictable in the short term. But if you can stay focused and hold for a long time, you’re likely to see much higher returns over the long term. Generally speaking, the longer you can hold, the better your odds of long-term success. Staying invested can help you overcome correction-related losses, with a longer-term perspective on the market.
Volatility: How much risk can you stand?
What Is a Market Dip?
A market dip refers to a decrease in a given market for a short period of time. Typically, these dips are consistent with the overall trend of the market increasing or decreasing. While the market dip may seem like a bad thing, it can be a fantastic opportunity for investors who are willing to take a long term perspective.
The important thing to note about market dips is that they typically occur for a reason. Either there is information that wasn’t known to investors, or some unexpected event occurred that changed investors’ perception of the market. Typically, the cause is irrelevant because in the long term, investors are always able to adapt and use knowledge of why the dip occurred to make decisions later that increase their chances of success.
What’s a Bear Market?
A bear market is a fall in stock prices across the market sell off. This refers to the stock market crash caused by the devaluation of stocks, which is triggered by a number of factors. These factors include a fall in the company’s revenue and profit, inability to meet financial goals, high inflation rate, a sudden rise in interest rate, etc.
A bear market is quite different from a bull market, as it is characterized by constantly falling prices for the stocks. It is due to the reduction in demand and supply or generally declining market sentiment. A bear market can last for a long period of time, but the fall in prices can be a short-lived phenomenon. However, bear markets do not last forever.The market recovers through a bull market in a couple of years.
Should Investing Be Your Priority Right Now?
What Should You Buy?
Whether you are a veteran trader or a neophyte investor, it’s hard to evade the many calls for a recession or even a stock market crash. As the market rollercoasters up and down in response to the sputtering US and global economy, investors get disconcerted.
At times, the sell-and-buy cycle can be exhausting. Not only does it erode your liquidity, but it puts you at risk for incurring taxes and penalties. Of course, you need to be worried about your capital gains, but if you sell based on fear, you will not avoid losses.
So what should you do?
Whether you are in my camp or you are a market bear, we can all agree that it’s better to own a security rather than sell it. Selling is a permanent move and buying later on is a speculative one. It’s okay to take some profit, but it’s not okay to sell in a panic … and that’s what the market is calling for, as the latest market dip has shown.
If you’re going to invest and play in the real estate market, be prepared to go when it’s not your ideal time. You’ll hear many people say that now is the ideal time. It’s not. The perfect time to buy something was a while ago. Just like in most investment scenarios, there is a wealth of information that will tell you when something is due for a downturn.
Television and podcast shows made about property flipping are littered with such information. And so are the many books written on the subject. The truth of the matter is that this information is available to you at any time on the Internet.
The real estate market never stands still. The downfall of property prices will always be relative to numerous other factors, some of which are already in train. It’s that train that previous forecasters use to create predictions that factor in inside information.
Once the information is released to the market in general, it’s too late for any intelligent investor to act on it. You can slow down your property acquisition to allow the market price to fall. But you’ll be missing that opportunity to pounce on properties as they become available.
How much volatility in a portfolio can be tolerated is really determined by the investor’s tolerance for risk and time horizon. Investors with longer time horizons to capital preservation tend to accept more risk for periodic volatility. These investors may want to build a portfolio of both stocks and bonds.
The question at hand is should bonds be purchased during the market dip. In my view, bonds are still cheap and offer yield. There are many bond issues that matche the bond durations to the fall of the market. However, the risks to these bonds are many.
If you hold a bond to maturity, then you have no risk of loss. However, if you choose to sell a bond, then you are likely to get a discounted price, if you decide to buy another bond of the same maturity then you will get a premium, if your holding period is shorter than your bond’s then you will not get a premium, and the third variable is the tax impact of the sale which is a wash in this market.
Therefore, the risk of the bond market is very real and your tax person should be consulted.
High-yield Savings Account
Have you ever looked at the balance in your checking account and say "have I really been spending all that?" It can be hard to believe sometimes. We set our monthly budgets based on our needs and wants, with nice buffer rooms for unexpected expenses and savings. When we think we're going over, we start to panic .
The panic mode kicks in because we fear: tapping on our emergency fund and losing it to the thieves and liars, maxing out our credit cards. We fear that when next month comes and no income has gone up, we will be forced into a place we don't want to be.
You don't have to keep letting your savings account and liquid funds be the victim of you not understand your true expenses, though. When you bet on the stock market, you can quickly and easily get your money when you need it, no questions asked.
Just take a look at the yield difference between the high-yield savings account and stock market.