How this January 2022 market turbulence affects you depends upon how old you are. For people in or near retirement, it is scary – yet there are ways to offset a shrinking stock portfolio. Regardless of your age, look at market dips as opportunities, not threats.
The recent market gyrations remind us of the vaudeville joke about one’s spouse:
- “How’s the stock market?” A. “Compared to what?”
January 24, 2022
For the three trading weeks of 2022, the stock market could be described as “tumultuous.” The S&P 500 Index, the DJIA, NASDAQ and Russell 2000 are all off from their recent highs – with NASDAQ entering correction territory and the S&P 500 dipping there too, albeit briefly.
But the activity on January 24th is hard to explain:
- Prior to the opening bell on January 24th, market futures pointed to a slight gain for the day;
- At the low point of the day, the DJIA was on track for its worst day since March 2020 as it shed over 1,000 points;
- NASDAQ had dropped almost 5% by noon;
- The S&P 500 had dropped almost 4% by noon; and
- Within minutes of the closing bell, markets reversed course and ended the day almost exactly where they started the day.
The nasty coronavirus is somewhat to blame, but that would not be telling the whole story, as:
- Inflation is raging;
- Fed-watchers are worried that the Fed will raise rates too quickly and too often in 2022;
- Tensions with Russia over Ukraine are boiling.
But Now Might be a Good Time to Invest
How such market action, which is normal, impacts you financially and psychologically depends on where you are, age-wise. If you are younger and have long investment time frames relative to your goals, a market dip can be your friend.
For example, let’s say you have young children and are saving for them in a 529 college savings plan, and college is a number of years away. If your account is down along with the market, compared to a previous high point, consider adding money.
Ditto if you are saving for retirement in a 401(k), individual retirement account or similar plan. If you save regularly, dollar cost averaging works. That’s where you invest a set amount on a regular schedule, perhaps at the first of each month. When stocks decline your contribution buys more cheaper shares and less expensive shares. Over time your average share cost is less than the current share price.
Is Opportunity Knocking?
If you are retired or some other life event has forced you to live off of your savings, naturally, you are nervous amidst scary headlines and histrionics of media commentators during significant market declines.
But consider heeding the words of the legendary investment manager John Templeton, who famously counseled, “Buy when there is blood in the streets.”
Occasionally you get event-driven market routs such as the aftermath of 9/11 in 2001 and the debt crisis of 2008. In your life span as an investor, you have hopefully saved for rainy days, kid’s educations, future retirement and life-enriching experiences like global travel. When markets dropped, you should have dropped in extra funds. It’s likely that you never bought at the bottom, as that is obvious only with 20/20 hindsight.
Your Investment Policy is Critical
The key is a sound investment policy that allows a cushion – in money market funds or other safe and low-volatility repositories that provides living expenses without having to sell stocks at low levels. Alternative investments in real estate, private equity and financing, energy infrastructure, etc., may also provide cash flows to supplement living needs without selling stocks.
You also may focus on value stocks with good dividends and reasonable P/E ratios. Such portfolios eschew aggressive growth stocks that pay no dividends and have no profits. A hot story may sell, but do economic fundamentals underpin the stock value?
No one likes to see markets continuing to set 1,000+ point-drops. And while the media continues to scream that the sky is falling, it’s not.
The sky is not falling as 2022 begins. But rain clouds and storm fronts can be vexing unless you are prepared with rain gear.
A comprehensive investment policy is the financial planning equivalent of rain gear. You may not be singing in the rain, but you can maintain financial confidence.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Private equity is money invested in companies that are not publicly traded on a stock exchange or that is invested as part of buyouts of publicly traded companies in order to make them private companies.
Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
The NASDAQ-100 is composed of the 100 largest domestic and international non-financial securities listed on The Nasdaq Stock Market. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology, but does not contain securities of financial companies.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
This article was prepared by FMeX.
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