ARE YOU WORRIED ABOUT THE STOCK MARKET JANUARY DECLINES?
Disclaimer: Good Day, Readers. WealthBuildingPowers blog is a financial literacy/competency blog and does not provide specific investment recommendations.
“When I buy a stock, I don’t care if they close the stock market tomorrow for a couple of years because I’m looking to the business, Coca-Cola {Apple, Amazon, etc.) or whatever it may be, to produce returns for me in the future. Now, if I care whether the stock market is open tomorrow, then to some extent, I’m speculating because I’m thinking about whether the price is going to go up tomorrow or not.” Warren Buffett.
Several readers asked if I was worried/selling shares due to the recent losses of the stock market. I am not selling, nor am I singing “Don’t Worry Be Happy.” Instead, I am analyzing market charts and trying to understand the critical reasons for this correction. See Below.
LET’S GO TO THE CHARTS {LOOK HOW CALM JAZZY IS!}
We are experiencing a routine correction, and the data has yet to indicate we are headed for a CRASH!
S&P 500 ETF TRUST {SPY} PERFORMANCE – YTD 8.8 PERCENT LOSS as of January 26, 2022
The S&P 500 ETF – SPY closed at $475 on December 31, 2021, and closed at $433.38 on January 25, 2022. An 8.8 percent loss, YTD.
POWER SHARE QQQ TRUST {QQQ} Nasdaq Top 100 Stocks. (More technical stocks, so more volatility)- YTD 13.39 PERCENT LOSS as of January 26, 2022
QQQ closed December 31, 2021, at $397.85 and closed at $344.57 on January 25, 2022. A 13.39 percent loss, YTD
iSHARES RUSSELL 2000 ETF {IWM} {TRACKS 2,000 SMALL COMPANIES} – YTD 11.90 PERCENT LOSS as of January 26, 2022
IWM closed at $222.45 on December 31, 2021, and closed at $195.97 on January 25, 2022, An 11.90 percent loss
CORRECTION VERSUS A CRASH
A correction is at least a 10% drop in a stock, bond, commodity, or index price. The average market correction is short-lived and lasts between three and four months. Two of the three above indexes are in a correction
ROOT CAUSES I SEE FOR JANUARY 2022, CORRECTION
- High Inflation – seven percent.
- Labor shortages, forcing companies to increase wages. These higher costs are ALWAYS passed to the customer. The jobs we called essential during a pandemic, {Jobs most of my readers do not want: Fast Food, Grocery Stores, Amazon, Walmart, etc.} are struggling to fill open positions and retain employees. Wages have increased well beyond federal and even state minimum wage (I think a good thing). These wages will not and should not return to pre-Covid levels, so this wage increase/inflation is here to stay.
- Federal Reserve announces they will stop buying bonds and will instead sell bonds. This action pulls cash out of the U.S. economy, deliberately slowing the economy. The Federal Reserve is attempting to reduce inflation.
- Federal Reserve plans several increases in interest rates starting March 2022. This action will make bonds more attractive and pull money out of stocks. When interest rates are low, stock valuations can rapidly increase. Rising interest rates pull stock prices back down.
- Tensions between Russia, Ukraine, and NATO/U.S.
- Tensions between China, Taiwan, and the U.S.
- Continued Supply Chain Disruptions.
- More significant tensions between U.S. Political Parties versus U.S. and Russia! EMBARRASSING!
A MARKET CRASH IS USUALLY CAUSED BY A CATASTROPHIC EVENT
A stock market crash is a rapid and often unanticipated drop in stock prices. A stock market crash can be a side effect of a major catastrophic event, economic crisis, or the collapse of a long-term speculative bubble. Reactionary panic will significantly cause panic selling that further depresses stock prices.
Potential Catastrophic Events:
- China attacks Taiwan, and other countries join in, causing a war between powerful nations
- Another covid variant spreads as quickly as Omnicom but is much deadlier.
- Unknown Event {most likely scenario} An incident we are not expecting can occur at any moment and crash the market.
CONCLUSION – NOT WORRIED ABOUT THE STOCK MARKET JANUARY DECLINES!
It is essential to note the difference between investing and trading. Traders purchase for the short term, while investors tend to buy assets with specific goals and time horizons in mind. As an investor, I attempt to purchase assets my daughter can one day be gifted or inherit. Traders, however, must know when to take their losses.
Investors must sometimes sell. I sell when my logic for investing has changed:
- I was wrong about the asset (real estate, stocks, ETFs, etc.).
- The fundamentals of the company or market have significantly changed. I sold Boeing when two aircraft crashed, killing over 300 passengers and evidence pointing to company officers’ gross mismanagement.
- I need to reallocate assets. For example, I have one stock that has grown significantly and now represents a percentage of my portfolio too high—time to trim.
- My timing changed. I retired earlier than expected.
Corrections occur frequently and tend to last a few months.
My Recommendations Today:
- Allocate your portfolio assets based on YOUR risk tolerance.
- If you do not feel comfortable/competent allocating your assets, hire a fiduciary financial advisor to review your portfolio. I recommend asking friends, family, and work colleagues for recommendations to find a competent fiduciary financial advisor. You can utilize online sources to find fiduciary financial advisors near you, along with their reviews. Interview potential advisors to select the best advisor.
- I prefer advisors who charge for their time versus managing your money and charge you ~one percent of your portfolio annually. One percent might not sound like much, but over 30 years, this can cost you $ Millions (future blog topic).
- Ensuring you are correctly allocated is critical the closer you get to retirement.
- Keep investing in your 401K and other investment accounts. When the market is lower, you buy more shares for the same dollars you previously paid. This is called Dollar Cost Averaging- Dollar-cost averaging.
Are you skillful enough to get back into the market after the market settles down for those who have sold or plan to sell and sit this correction out? Most people miss out on significant days as the market is rebounding. You cannot afford to miss those days!
LET’S MAKE SOME MONEY – CRYPTOCURRENCY IS ACCEPTED!
YOUR GREATNESS IS NOT WHAT YOU HAVE; IT’s WHAT YOU GIVE! – EXAMPLE CHARITIES I SUPPORT
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Wilson’s No-Kill Animal Shelter: https://wcnkas.org
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ABOUT ME
I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with an N.C. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life. It is my time to serve and give back.
DISCLAIMER
I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate and am happy to share my finance and investment lessons. I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog as recommendations for your situation. As an investor, you must establish your risk/loss tolerance. Investment in any asset involves risk, including complete loss.
Please seek your licensed CPA or fiduciary financial advisors for individual financial advice.
I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.