I have been saying since I the 1970s that I Love a Good Correction. Most will panic when we have a correction, and we always have corrections. My clients often kid me because I love a good correction as it brings reality back to investors and to markets. It also brings some good buying opportunities. Knowing how to properly balance a portfolio is tough to do. It is art, math and experience.
Human nature is the reason for the boom and bust of the markets. When times look good, negative news is overlooked and when times aren’t good, good news is overlooked. This causes markets to overshoot their real value and they need to correct (up or down).
I thought I would put together some thoughts about our current situation:
News sources are there to make the news company money through ads. The more eyes that watch or read them the more they can charge. This causes everything to be sensationalized to get your attention. They have no vested interest in making you money and protecting you. They do better with a good correction, up or down, than they do when everything is average.
Stock market corrections happen often and it is always a set of circumstances that are at fault, but the main one is human nature. Markets have run up farther and faster than it should.
Corrections are a great time for individual stock traders to buy high-quality stocks at a bargain. If you have managed product (mutual fund, pension plan, segregated fund…) you can rest assured the fund manager is taking advantage of this for you.
Many ETFs dropped much farther than the market. Top to bottom the S&P 500 dropped about 5% before it recovered, yet some large ETFs dropped as much as 35% before recovering (for example DVY). None of its top holdings were even close to this. There are quotes like “somewhere along the way the ETF model was broken today”, “When markets get hairy, sometimes those liquidity providers step out of the way to avoid getting run over” and “They better hope they don’t have a confidence problem here.”
Program trading in ETFs and stocks helped cause the problem. In an afternoon email, Peter Tchir at Brean Capital wrote that "We are all looking for capitulation and wondering if that is what we had on the open? I'm afraid all we had is chaotic dislocation, which I don't think is the same thing."
I wrote an article called Real Market Risk. It is about real market risk, ETF liquidity and corrections on April 11, 2015. Please take the time to read this as it is on point for what we are in now: http://goo.gl/hySHJg.
My article warning about certain Bond ETFs’ liquidity to be a problem that could also hit the Stock Market ETFs. http://goo.gl/GEj8TN.
There is a lot of speculation as to whether this is over. History shows us that probably it is not. The average correction last about 90 days. This does not mean it will crash from here, but a wise stock investor will take this great opportunity to strengthen their portfolio. The institutional portfolio managers will be taking advantage of any weakness to strengthen their portfolios for you.
“the time to buy is when there’s blood in the streets.”
This is not the time to panic; it is the time to make intelligent decisions. One of my favourite quotes comes from Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family. He is credited with saying that “the time to buy is when there’s blood in the streets.” This sentiment has been echoed and attributed to over the years by two of the wisest investors of our time: Warren Buffett and Sir John Templeton.
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