Newsletter June 29, 2010
InvestorsFriend Inc. Newsletter June 29, 2010
The UP-SIDE of DOWN
The Canadian stock market lost 3% today (Tuesday June 29). And it’s down over 8% from its recent highs.
Most investors will see that as bad news. But a drop in stocks is both bad news and good news.
For most investors, it’s probably good news.
Now obviously if you are planning to cash out of the markets tomorrow to buy a house or something it is bad news.
And if you are retired and living off a 100% equity portfolio it’s generally bad news especially the older you are. That’s because you would have no cash to invest in stocks at lower prices.
But for most investors, lower stock prices are good news.
Consider a young investor just starting out, cheaper stocks are obviously unadulterated good news.
And consider a 50-year old who plans to keep investing for ten more years and then retire. Lower prices hurt the current portfolio value but also allow purchases at lower prices. In ten years today’s market dip is likely to be a distant memory. The portfolio is likely to recover and so it’s only impact will likely be the fact that it allowed some bargain purchases. Basically, volatility is an investors friend. It is something to be taken advantage of rather than feared.
Will stocks continue to plunge? Maybe they will, maybe they won’t. I don’t know and I don’t think anyone else really knows either.
Will stocks ultimately recover and move to new highs? Almost certainly although it may be a while.
My strategy during this latest market dip is to slowly add to positions in stocks I like. Many investors would question the sanity of buying into a market correction. But my belief is that no one knows when stocks will go back up. If I am to buy at lower prices then buy I must. I don’t need to spend all my available cash all at once. But if I am to take advantage of lower stock prices then I have to pull the trigger and buy at some point.
Remember March 2009, when portfolios were decimated by losses? That really hurt. But it was also the golden opportunity of a lifetime to invest at low stock prices. To those who could see the opportunity, who had the funds to act and the bravery to buy went the spoils.
Warren Buffett’s Advice
I have read Warren Buffett’s advice over the years. His advice has been remarkably consistent over the years.
Recently I summarized the advice that he gave in his earlier investment years. In those early years he was investing smaller sums of money and it is instructive to see what his thinking was. You can get some understanding of how he though about bull markets (dangerous) and bear markets (opportunity). You can review my summary of Buffett’s early letters to investors here.
Shawn Allen, President
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