There is an old expression on Wall Street that says, “Buy on the rumor and sell on the news.” I can’t think of a better example than this January that illustrates this timeless phrase. What does it mean? It means that the markets cratered (some cratered harder than others), bounced back and then cratered again. It did this largely in part of the rumor that the Federal Reserve is going to raise rates. While I am confident that rates will increase at some point, we don’t know how much or when. Everybody has an opinion on this and conjecture aplenty. AllianceBernstein predicts 6 percent increases over the next three years, according to CNBC! Rumors like that sent the market tumbling as one might expect. On top of that, Russia appears to be invading Ukraine.
None of these things are actual news. The Fed has not raised rates, and Russia has yet to invade Ukraine. Clearly investors get jittery around fear, anxiety and uncertainty. This is not breaking news to any of us. Markets respond negatively to feelings of fear and anxiety all the time. In fact, corrections happen regularly, and it wouldn’t be surprising to see continued volatility or more major drops. In 14 of the last 22 years, markets have dropped at least 10 percent at some point in the year, according to JP Morgan. Think about the significance of that intra-year movement. At some point in 14 of the last 22 years, you looked at your 401(k) or your investment portfolio and you were down more than 10 percent, only to rebound at some point later in the year.
A sophisticated investor should be looking at times like today as an opportunity to buy. Another old Wall Street expression is, “The best time to make money is when there is blood in the street.” One could argue there was blood in the streets in January and the beginning of February. The question you should be asking is, what should you be buying in times like this?
First and foremost, you will want to have a balanced portfolio so only a portion of your portfolio is negatively impacted by negative volatility. The part of your portfolio that maximizes corrections like this should be in stocks. I am particularly fond of Fortune 25 companies when you can get them at such a significant discount. Regulations won’t allow me to name any specific companies, but we are experiencing significant lows on several major successful American companies.
While we are experiencing increased interest rates, taxes and 40-year-high inflation worries, these are not reasons to panic. The significant news of the past weeks are simply rumors trying to determine what the Federal Reserve is going to do. These rumors have created an immense buying opportunity to get assets at discounts, and to follow the old expression, would mean to then sell those assets when the actual news of the interest rate change happens. In my experience, rumors create more anxiety and worry than actions do.
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