Life Cycles and Market Cycles

It’s a throwback to the vaudeville joke about one’s spouse. Q. “How’s the stock market?” A. “Compared to what?”

  For the week ending April 11, stock market action was described as “tumultuous.” The S&P 500 stock index shed 2.65%. The tech-heavy Nasdaq dropped 3.1%. The selling largely was traced to traders and hedge funds bailing out of risky bets in social media and other high-flying momentum plays.

  Compared to the stock’s 52-week high, Facebook was off by -19%; Google, down -13%; Netflix, -29%; electric car maker Tesla Motors, -23%. All represent classic momentum-fueled plays. The dividend yield is zero and the price as a function of earnings (p/e ratio) is sky high. Investors are buying a story, hoping that the hype propels the stock higher. When a few big investors head for the exit, such stocks can come back to earth in a hurry.

 How such market action, which is normal, impacts you financially and psychologically may depend on where you are age wise. If you are younger and have long investment time frames relative to your goals, a market dip can be your friend. For example, if you have young children and are saving for college in a 529 College Savings Plan, and college is a number of years away, when the market is down compared to a previous point, add money. As with items of any type on sale offering cheaper prices, you are wise to take advantage.

 Ditto if you are saving for retirement in a 401(K), IRA, or similar plan. If you save regularly, dollar-cost-averaging works. When stocks decline your contribution buys more cheaper shares and less expensive shares. Over time your average share cost is less than the current share price.

 Early in my investment career I was privileged to meet and learn from the legendary John Templeton who famously counseled, “Buy when there is blood in the streets.” Occasionally you get “event-driven” market routs such as the aftermath of 9/11 in 2001 and the debt crisis of 2008. In my life span as an investor, saving for rainy days, kid’s educations, future retirement, and life-enriching experiences like global travel, when markets dropped I dropped in extra funds. Never did I buy at the bottom as that is obvious only with 20/20 hindsight. But given time, the investments were wise.

 If you are retired or some other life event has forced you to live off of your savings, naturally you are nervous midst scary headlines and histrionics of media commentators during significant market declines. The key is a sound investment policy which allows a cushion, a “paycheck fund” in money market funds or other safe and low-volatility repositories that provides living expenses without having to sell stocks at low levels. Alternative investments in real estate, private equity and financing, energy infrastructure, etc., may also provide cash flows to supplement living needs without selling stocks.

 You also may focus on value stocks with good dividends and reasonable p/e ratios. Such portfolios eschew aggressive growth stocks that pay no dividends and have no profits. A hot story may sell, but do economic fundamentals underpin the stock value?

  In the action the week of April 7-11, individual investors and mutual funds did not participate heavily in the selling. After a strong advance in 2013, and further recent record highs, a pause is to be expected. Even a 10% decline from a previous high should not be a surprise.

 But most market watchers note that the U.S. and other economies continue to grow and recover from recession, despite periodic worries about China’s growth rate. Low interest rates, while irritating savers and retirees, remain largely in place, helping borrowers who want to buy homes or expand a business.

 The sky was not falling the week of April 7. But rain clouds and storm fronts can be vexing, unless you are prepared with rain gear. A comprehensive Investment Policy is the financial planning equivalent of rain gear. You may not be “singing in the rain” but you will maintain peace of mind!

Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com