By Carol K.

Happy New Year, everyone!  I hope everyone had a happy and relaxing holiday season – or as happy as can be in the midst of a global pandemic.  I’ve been fighting a bout of pneumonia and was officially diagnosed with “The Covid” (as it’s known in my neck of the woods) last week. I am blessed in having access to a fantastic team of doctors and my family taking excellent care of me. 

After the holiday hiatus, I was eagerly anticipating getting back to work in my home office this morning — markets are my passion, so it’s not really work.  Things started out promising, the three major indices in the green in the pre-market.  I messaged Gregor saying it appears we’re picking up where 2020 left off.  I checked my Twitter feed an hour or so later to see what’s going on and BAM! …the Dow had dropped over 600 points, and the S&P 500 and Nasdaq were down by similar scary amounts.  And you know what?  I didn’t even go to CNBC to see why, because I’ve learned in my time managing my own portfolio that the “experts” rarely know why these drops occur. 

Having experienced a few down days in my time managing my own and my family’s charitable foundation money, I’ve developed a set of guidelines which I sent out to a family member earlier today after she frantically texted asking what was going on in the stock market and how she should react.  I thought I’d share my thoughts today with GMM readers as well. 

CK’s Thoughts on Market Volatility

Try to have some liquid “dry powder,” funds that can be used to purchase stocks on your watchlist when a market selloff occurs.

There’s a clear pattern I’ve noticed over the years regarding market selloffs. I’ll retrace my observations here for our readers.

1. Fear sets in over some perceived threat (Dems taking the Senate, threat of a massive Covid resurgence threatening almost total shutdowns of the economy, Bitcoin collapse, Trump starting a war, runaway inflation or stagflation sets in, etc).  Take your pick, it doesn’t matter which one if any, the narrative you select.  Trust me on this.

2.  Just about every stock in the market drops dramatically, regardless of the quality of the company, it’s fundamentals, what products or services it offers.  Nothing matters, traders and many investors alike panic, and a massive selloff ensues.  Fear-based selling begets more selling until the market eventually bottoms.

3.  A few days will pass, the event or narrative in item #1 either happens or doesn’t happen.  It doesn’t matter if it happens or doesn’t happen; trust me. 

4.  At some point, and probably sooner rather than later, the cream will start to rise to the top again.  In 2021, the “cream” is high-quality, forward-looking companies in technology, the disruptive space, and of course, essential products and services, aka, consumer staples and healthcare. 

5.  Timing the absolute bottom is an exercise in futility, but once you’ve been through a few of these massive sell-offs, you begin to get a feel for when it could be an excellent time to start dipping your toes in the market waters and start buying a few shares at a time.  With commission-free trading offered through most U.S. brokerages, buying in smaller lots is the smart way to buy.

6.  Patience is critical here.  It can be hard to hold on when you look at your portfolio and see a drop, whether it’s 2% or 20%.  As the legendary Tom Petty (RIP) sang, “the waiting is the hardest part’.  Investors and traders are warned not to “catch a falling knife,” but it’s also important not to wait too long on the sidelines until the rebound is clearly in play.

7.  Remember this: stocks go up, and stocks go down; over the long run, the U.S. stock market has returned an average of 10% per year to those with the patience to stay invested at all times.  It’s not a straight line up; indeed, it’s quite often a bumpy ride.  Alas, at the end of the day, if you can’t stomach an occasional 10-20% drop, you probably shouldn’t be invested in the stock market.  I hear money market funds are paying something like 0.03% APY…

8. Finally, to paraphrase Gregor: all of the above in the context that valuations are “very stretched” to begin the New Year, to say the least, and the market tends to regress to its mean valuation. That is exactly why I begin the year with a relatively large cash position. Many stocks are more overvalued than others and won’t generate the returns as others going forward. I honestly believe my focal areas of tech, particularly in disruptive innovation, and healthcare will greatly outperform due to their potential growth trajectories.