Markets in 2016 have had the worst start to a new year since, well, ever. The media is in a frenzy proclaiming the coming D-Day of the market. While the rest of the world is panicking, though, we see this as yet another example of why you should feel like it’s an after Christmas sale on stocks rather than the end of the market.
The essence of investing is to take profits from investments that have done well and use those proceeds to buy things that haven’t done well but that should recover over time. In the simplest terms, buy low, sell high, repeat.
The first trading day of the year saw the three worst performers of 2015 turn around to become the best performers. In fact, so far in 2016, the absolute worst performer of the Dow in 2015, Wal-Mart, is the only Dow stock higher for the year.
The Dow is an index that tracks 30 stocks which, in theory, best represent our economy. So far Wal-Mart is up nearly 4% for the year, and the next best stock in the index is McDonalds which is down over half a percent. Wal-Mart is rising in a market that is falling, but that wasn’t the case last year. Wal-Mart had a dismal 2015. It was actually the worst performer in the Dow, falling 26.6%.
If the average investor began building a portfolio on January 4th, 2016, they most likely would have avoided Wal-Mart. The average investor would ask, “Why would I want to buy a company that has fallen nearly 27% in one year?”
It’s the psychology of the average investor that puts them behind the eight ball for success in the markets. The average investor is scared to sell things in their portfolio that have increased in value because they seem safer, and maybe there’s a hint of greed as well. Sometimes the stocks that continue to perform well are good companies to keep in your portfolio. For other stocks that are performing well, though, it might be better to sell them while they’re valued high and then take that money and invest in a company that’s price has slid lower recently but that you believe will be around longer-term. Again, it’s that goal of buy low, sell high, repeat.
Today’s market environment is providing investors plenty of opportunity to buy investments that are down. Unfortunately, many investors won’t get to that point because they can’t get over the psychology hurdle of investing in companies in the red.
The best way to avoid this pitfall is to be strict with re-allocating your portfolio. Make it a priority to get your portfolio back into the appropriate allocation once or twice a year. Look at your growth and income buckets to make sure they align with your desired balance between both risky assets (growth assets) and conservative assets (income assets).
You can learn more on how we help our clients re-allocate their portfolios in a timely manner through technology and investing here. You can also sign up to talk with one of our advisors about your current allocation and what they see as some possible opportunities for you.
Oh, and if you were interested in why Wal-Mart may be moving higher this year, well, a couple things are feeding into it. Not only is it the contrarian effect (worst performer in past, doing well), they have a dividend yield of about 3%, and they also have one of the largest fleets of trucks in the world. Lower oil prices have helped them there. On top of all this, their core consumer stands to benefit the most from lower oil prices and more money in their pocket. Sometimes you just have to look past the red numbers and negative media headlines.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.