According to the media, we’re on the
verge of a global pandemic. Last week, the stock market returned its worst week
in over a decade. Is it time to get out before the inevitable collapse of the
world’s financial markets?
When it comes to investing, I’m a bit
of a contrarian. I look at a market downturn as a buying opportunity.
On Monday, my brokerage account was
flush with cash as several of my positions had been called away on Friday. So,
I went bargain shopping and quickly sold slightly-out-of-the-money covered
calls on those new holdings.
I’d have paid less for those new
stocks had I waited until Tuesday. And I’d have found even better prices if I’d
waited until the end of the week.
Some investors might bail out and cut
their losses. But I’m holding on.
If those stocks don’t hit my strike
prices by expiration Friday, I’ll still own them and try to sell more calls for
next month.
All the companies I invested in just
released stellar earnings reports. They’ve been paying dividends consistently
for years. They’re solid businesses. At this time, I believe their stock prices
will recover.
When President Trump took office, the
Dow Jones Industrial Average (the main gauge we use for the stock market) had
not yet reached 20,000. Before the coronavirus hysteria, it was approaching
30,000. On Friday, it closed at 25,409, still much higher than it was four
years ago.
Market corrections (a decline of at
least 10%) are normal and healthy. If your 401k, IRA, or pension is invested in
mutual funds, chances are you’re participating in the stock market (over 50% of
America’s households are) whether you realize it or not. If the dividends are
being reinvested in additional shares of the mutual fund, a correction allows
you to buy more shares of the fund with each distribution. This is one of the
benefits of “dollar-cost averaging.”
The stock market was due for a
correction and the coronavirus provided an excuse.
Even though I advise against panic
selling, I think a large market downturn or correction should serve as a
reminder to review your portfolio. Is your asset allocation on track for your
age and risk tolerance? Are your investments diversified enough?
If there’s a stock you’ve been eyeing
but it’s been too expensive, now might be the time to buy. But first, do some
research. Are the fundamentals still good? How will the coronavirus affect its
business going forward? If it looks like the price will continue to fall, maybe
you should wait.
If you’re overweight in a stock that could
be adversely affected, you might want to set a stop loss or limit order to
sell. Any losses will help to offset gains elsewhere when tax time comes
around.
Before you leap into the market and
start snapping up bargain-priced stocks, remember this caveat: Don’t play with
money you’ll need in the short term. Historically, stocks have increased in
value faster than any other asset class, so they’re appropriate for the long-term
investor. Even so, it’s a roller-coaster, so don’t invest if you’re prone to
panic.
What are your thoughts on the market’s
reaction to coronavirus? I’d love to hear your comments.
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