As a CERTIFIED FINANCIAL PLANNER™, former advisor and portfolio manager for one of the nation’s largest wirehouses, Andy understands what it is like to sit across from a client during good times, but more importantly, during bad times when markets are down.
I was recently interviewed and featured in an article published by The Motley Fool in the UK. The young financial columnist that interviewed me, John Choong, follows the stock market and wanted to know whether or not he should consider “buying the dip” in the U.S. during the current stock market correction.
Here are some of the points we discussed during the conversation:
- Time is your best friend.
Young investors in the accumulation phase are the ones who are often best positioned to take advantage of buying opportunities during a bear market. Today’s market correction in the U.S. can allow young investors to pick up good discounts on mega-cap companies with healthy balance sheets, attractive margins, and pricing power. For instance, the tech-heavy Nasdaq is down over 12% so far this year, presenting plenty of opportunities to buy shares in high-performing tech stocks.
- Rising interest rates in a strong economy.
Even if the Federal Reserve does raise interest rates several times this year, as they have said they will do to help curb inflation, I believe there is enough economic data to indicate that the U.S. economy is strong enough to handle it. We continue to see strong employment numbers, heavy assets, and positive earnings results.
Furthermore, declining oil prices seem to indicate that inflation may be peaking. Nonetheless, oil remains the biggest issuing affecting consumer prices and it could spark chaos again if it spikes above $100 or so per barrel.
- True diversification is key.
This year’s stock market correction could be short-lived due to the positive economic data coming in, especially once inflation cools down and supply chain bottlenecks ease. But new stock market highs could be followed by a potential recession next year and into early 2024. This is most likely to happen once ‘stagflation’ (high inflation, but slow or no real economic growth) starts to take effect.
Is your client’s portfolio properly positioned and diversified to withstand bear market dips? Especially your clients getting close to or in early retirement? We have ideas about that: https://thequantum.com/protecting-the-portfolio-from-sequence-of-returns-risk/
- Buying the dip general rule of thumb.
For the right young client, you might want to allocate 15% to 20% of their portfolio to buying the dip—when you see anywhere from a 5% to 10% decline in a specific stock you feel is still a good value for them.
- Know your client’s risk appetite.
Even some young investors want the assurance of guarantees. Don’t assume that just because a client or potential client is young that they are willing to lose money hoping to regain it later during future bull markets due to dollar cost averaging. Yes, that is what you and I probably believe to be the best strategy, and it’s the one that I use. But it’s your job to assess each client’s risk profile. There are plenty of young consumers who also choose to own stable, guaranteed products because they dislike risk and don’t trust the stock market.
You can read the published article here: https://www.fool.co.uk/2022/04/08/should-i-buy-the-dip-in-this-stock-market-correction/