The first week of trading is in the books, and it was the worst first week of a new year ever. Stocks have never gotten off to a worse start. That’s pretty amazing.
I mean, yeah, it was a sharp sell-off — if we go back to when the selling started on December 30, the S&P 500 has dropped 7.4%. Of course, the S&P 500 has seen worse seven-day declines. They’ve just never happened at the start of a New Year…
The most recent parallel was January 2010. Between January 20 and February 4, the S&P 500 peeled off 8.9%. Then it went on a fantastic run and was setting new highs by the end of April. But of course, that sell-off didn’t come in the first week of January.
Stocks usually start a year in decent shape. The reasons why are pretty simple. From a sentiment perspective, it’s a new year, so there’s usually a little optimism. And from a fundamental perspective, funds are usually allocating new capital into stocks they think will do well.
It’s pretty clear that neither of these dynamics is in play this year. Sentiment on China, emerging markets, and global growth is bad. And funds are not allocating new money, but rather selling and raising cash that may be put to work when sentiment is better.
Some people are saying the global economy is entering a recession. Some are saying a bear market has already begun and the S&P 500 will lose another 20% to 25% in 2016. And they may be right…
I’ve discussed many times how the growth problems from China are affecting the entire global economy. It’s not news anymore. We’re in the reality phase now — where growth estimates and earnings estimates are being revised lower. And the stock market is just starting to react, to really start pricing it in… Just 10 days ago, the S&P 500 was ~60 points from all-time highs.
But here’s the thing: If you’re freaking out about a further 10% drop for the S&P 500, then you’re doing this whole investing thing wrong…
What Goes Up Must Come Down
The other day, I saw a guy on CNBC say people should sell all their stocks, 401(k) funds, IRA funds, ETFs, and whatever else they have and go to 100% cash. This guy thinks the S&P 500 may drop another 200 points. And… he might be right. The S&P 500 is already 200 points off its highs, so who’s to say it won’t fall another 200?
Because this is what prices do. They go up, and they go down, just like how economies expand and contract. Does it make any sense for a business owner to close up shop when the economy looks dicey, and then re-open when the economy looks better?
Of course not. But so many investors seem to be enamored with the idea that they can deftly time the market — buying before the big moves higher, and selling before the drops. Sure, it sounds great. You only make money and never lose it. And if you try to time the market, you may be successful a time or two. But eventually, you will buy or sell too soon or too late.
Let me share with you a stat I ran across recently to demonstrate…
In 2014, the S&P 500 had a great year, rallying a fantastic 13.7%. Sounds like it would have been no problem to make money that year, right? Well, not necessarily. If you missed just the top 10 biggest gain days of 2014, you would have suffered a loss of 3.1%.
Those 10 days accounted for over 200 S&P points. And that’s about all there was in 2014. So if you want to try to nail the 10 strongest days of the 252 days the market is open, more power to ya. But that’s not investing — it’s trading. And that CNBC guy’s suggestion that you trade in and out of 401(k) funds is just stupid.
Think about it: Every time you buy a fund in a 401(k) account, you pay a fee. And you will often pay another fee if you sell a fund before a certain holding time, usually a year. A buy and sell in under a year might cost you 3%.
When the average year posts a gain of around 8%, that 3% automatically puts you in a hole. You simply can’t outperform if you start down 3%. Plus, your chances of missing the big moves higher are far greater.
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Nobody Knows…
Investing is a long-term endeavor, where you ride out the market’s highs and lows with quality stocks and enjoy the benefit of dividends and compounding interest. That’s how you make money over time. It’s a simple method that’s pretty much guaranteed to work.
January 2 was the first day of trading last year, 2015. The S&P 500 opened at 2,058. On the final day of 2015, December 31, 2015, it closed at 2,043. It was a down over the year. But that doesn’t mean you would have been better off on the sidelines.
Consider one of the dividend stocks in my Wealth Advisory dividend/income newsletter. It’s a very boring, very reliable real estate investment trust (REIT) called Realty Income Trust (NYSE: O). This stock started 2015 at $48 a share. It ended the year at $51.63. That’s a 7.5% gain. Throw in the 4.5% dividend, and you’re looking at a 12% gain — during a year where the S&P 500 did nothing (and the vast majority of S&P 500 stocks were down significantly for the year).
Now, I can’t say Realty Income is one of my favorite stocks. It’s too boring. The company owns retail space that it rents to fast-food restaurants and other businesses. There’s never anything fun to write about with this company. But I consider it a cornerstone for any investment portfolio because it’s ridiculously reliable. Occupancy rates have been above 96% for over 20 years, and it has raised its dividend by at least 10% every year for 20 years, too.
You basically can’t go wrong with Realty Income Trust. It’s going to grow your money — year in and year out. And THAT is the point of investing.
Oh, and on December 30, when the S&P 500 started its 7.5% drop, Realty Income closed at $51.97. Last Friday, January 8, it closed at $51.17. Hotshots like Apple and Facebook have dropped more than 10%, while Realty Income is down just 1.5%.
Now, I’m not picking on momentum stocks like Apple or Facebook. You should have new and growing companies in your portfolio, too. Heck, one of my favorite growth companies is First Solar (NASDAQ: FSLR). On December 10, it was a $53 stock. As of Friday, it was above $65. Yeah, it’s been rallying as the market has sold off!
If you have a well-constructed portfolio of stocks, there is no need to freak out when the market drops 10%. And there’s no need to sell if you’re worried the market will fall another 10%. In fact, when the market falls like it has, you should be trying to buy more shares of the quality stocks you own.
Bull markets end. And so do bear markets. Get yourself some quality dividend stocks that pay you year in and year out, and you won’t have to worry about what the market’s doing.Until next time,
Until next time,
Briton Ryle
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
