This week has marked a drastic sell off in the US stock market - a pullback that is very much resembling the likes of what we saw during the Great recession of 2008. So far, this month alone has erased all the stock market gains for the whole year. The Dow, S&P 500 and Nasdaq are all down this month ( -6.7%, -8.8% and -10.9% respectively). But in times like these, here are some key things to remember: 1) not all market selloffs are created equal, and 2) not all investors are impacted universally. A market selloff cold be a really good thing. It all depends on the reason for the market move and how the investor is positioned for it.
Reasons why a market sell off could be a good thing:
#1 You're not already in the game.
When stock market prices decline, it's a really good opportunity for those newbie investors (or non-investors, or wannabe investors, or "procrastinvestors"), who have been waiting and watching from the sideline, to finally get off the bench and get in the game! In the case of this year, you've been watching people make money all year long, wishing and hoping it was you. The good news for you this time: As of Oct 26th, the US stock market had nearly erased all the gains it made from the entire year -- so it's essentially as if you've been playing all along since January! So while others scatter around trying to figure out what to do with the money they've lost this month - it may be a perfect opportunity time for you to jump into the game!
#2 Market is too damn hot.
Cool off periods are a good thing when the market is becoming a "bubble" - that means its too good to be true. For example, let’s remind ourselves of the good ole days leading up to the 2007 housing bubble when anyone could own a home (no job, no income, no credit, don't matter ... ummm yea, too good to be true. And we all saw how that played out). It took a market crash to bring down home prices back down to a more normalized level, and people were able to take advantage of discounted inventory. (I must note though, a market crash of this proportion his very extreme, so this is definitely an exaggerated example). But all i'm trying to say is .... A market retreat is not the end of the world. And it actually should be welcomed, especially when some asset prices are marked higher than their actual worth. These are inflated values that could cause more harm in the long run.
#3 You're a pessimist.
In every other aspect of life, this is usually a bad thing. But in the case of a severe market decline -- you could be a winner. There are people who make bets against the stock market and that prices will fall. These are called short positions, in which the investors with this pessimist outlook actually makes money and positive return. Market downturns are their "I told you so" moments where they can gloat in their temporary profits. But pleeeease hear me when i say this: Shorting the stock market is typically very risky and should be left to experience professionals and/or those with a high tolerance for risk and loss. Don't believe me... just look at the statistics.
#4 When it triggers new investment (and investment ideas).
This is my favorite reason! Market disruptions cause people to think and reevaluate their investment portfolios, which is good for everyone. Just imagine if markets were on auto-pilot, and everyone and their mom had Amazon stock and just watched it go up forever. (snoozefest!) There are other sectors and companies performing just as well, and the truth is, we need market shake ups to break this complacency. The pure idea alone that the US stock market may not perform up to standards will force money managers to look at different geographical markets, different investment vehicles and different asset classes. Innovation spurs and new investment idea are born. We all win here folks!
Overall my friends, in volatile market environments like the one we've seen this October, it's important to understand impact the market selloff will have you as an individual, your investment strategy and your portfolio. It's also key that you know your plan of action ( will you just ride it out? are you going to adjust and re-balance your portfolio? will you sell it all and cash out?and buy it back later?...). No one can ever guess how these things will play, that's why there's risk with every reward. Just know that if your strategy is long term, then cycles will happen (it's called life folks!). Be confident in your decisions. And don't be so down about a downturn. Happy investing!