What To Do When The Market Is Volatile?
Don’t Listen To Me, But Please, Hear Me Out: # 29
Shaheeda Abdul Kader, Jan 28 2021
Is the recent market volatility making you bite your nails or have you just decided to chuck it all and giggle at all the memes about Hedge Funds, Wall Street Bets (WSB) and a hapless company called GameStop ($GME)?
Like most people, I too am totally bewildered by the cheeky shenanigans of a group of redditors, calling themselves Walls Street Bets and the much loathed Hedge Fund managers. WSB even managed to bankrupt one Hedge Fund and nearly broke another.
Billionaires like Elon Musk, Chamath Palihapitiya and Mark Cuban applauding WSB added fodder to the greatest reality show: a modern day David Vs. Goliath. Nonetheless, I’m honestly ready for the market to get back to some equilibrium. (If you want the back story this tweet thread is great.)
Why? Because as in all wars, the common man/woman are the greatest casualties. Even as Hedge Funds are squeezed, they will have to liquidate their positions in normal stocks to pay for their losses. This in turn means, normally well-performing stocks will also drop in value as we have seen in the last two weeks. Average, older investors who hold these stocks, and who are not playing the options games will see the value of their portfolios go down. Some may panic and sell too.
And that brings us to the topic du jour. What should the average investor do to avoid getting shot in the crossfire between elite Hedge Funds and Rogue Reddit, Robinhood traders?
Keep Calm And Enjoy The Memes
Stay patient and remember time is your friend. I highly recommend that you refer to one of my first blogs where I discussed importance of Time In The Market with some great examples. Your patience to remain invested for longer period, perhaps even your entire life time, will play the biggest role in how well your wealth compounds and grows.
Let us look at the most illustrious investor of our ages, Warren Buffet, to understand time and compounding.
I was listening to Morgan Housel’s “Psychology Of Money”, which is a good book if you are new to investing and are nervous about how to behave during volatility.
In it he says Warren Buffett is actually not the best investor. Buffett’s wealth is due to the long time he has been investing. In other words, the compounding impact of long-term investing multiplied Buffett’s wealth.
Pictures speak a thousand words, so here is the hockey stick growth chart of Buffett’s Net Worth.
As you can see Buffett’s Wealth sky-rocketed once he hit 50. He started investing as a child. At 14 he had $5,000. He made his first million at 30; Compounded it 100 times to $100 Million in a mere 10 years at 40; hit $1 Billion at 55; at 90 he is now worth $88.5 Billion.
Warrant Buffett made 99% of his wealth after he was 50 years old.
Buffett has been consistently investing for over 75 years.
Gimme A Little More Time Baby…
“The big money is not in the buying or the selling, but in the waiting.”Charlie Munger
Jim Simons of Renaissance Technology, ahem, a Hedge Fund is actually a better investor. Renaissance Technology’s flagship Medallion Fund returned 66% compounded annually before fees and 39% after fees for over 30 years. However, at 83, Jim Simmons’ net worth is $21.6 Billion, much less than that of Buffett’s. Why? Because Jim Simmons started his fund at 50 and Buffett and Buffett started investing when he was 10 years old.
PS: Don’t bother googling the Medallion Fund. Sadly, it’s closed to new investors.
If you need more convincing, let us look at the S&P 500 Index ETF, SPY.
SPY Performance Over Time
SPY ETF which tracks the S&P500 index is up 760% as on Jan 28 2021 from its inception on Jan 29 1993.
If you just look at the last 2 years also, SPY performance is great. Had you stayed invested, you would have had an 18% return in 2020 versus the 0% you get from your bank.
As you can see historically, the market always goes up in the long run. But what about the reddit guys making millions on GameStop? How can you make a million dollars in a few hours?
“My system in life is to figure out what’s really stupid and then avoid it. It doesn’t make me popular, but it prevents a lot of trouble.”Charlie Munger
Fear Of Missing Out or FOMO
WSB: Sir, this is a CasinoWSB Memes
As always I do not recommend trading in options. Traders on WSB reddit are buying call options. Although the upsides can be high for Call Options so long as the stock price rises, you can also lose the entire value of the option price you paid if the stock price falls by the time the option expires. If you buy PUT options, you will lose if the stock price goes up. Investopedia has a good beginners guide to options trading.
It is best to be patient and consistent.
Moral Of the Story
- Start investing as soon as you can.
- Stay invested.
Time In The Market is what matters. Timing the market is very difficult.
Investing small amounts consistently over time will ensure that you are never caught investing at the highest prices and selling at the lowest prices. The longer you stay in the market and consistently investing, the better your long-term results will be.
If you are worried or want to limit your losses, and you have an investment advisor, talk to her about rebalancing your portfolio.
I usually blog about investing in the stock market. If you would like help on how to budget, save or invest more, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at firstname.lastname@example.org. I’d be happy to offer you my services. Please do check my other blogs here.
I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me, and I’ll do my best to help you with your queries.