SI Ferique

 

November 13, 2014

 

Buying the dips?

 

Between mid-September and mid-October of this year the S&P 500 fell by nearly 7%. However in the ensuing weeks, the index, which tracks 500 of America’s largest-publically traded companies, made up all the lost ground. By the end of October the S&P 500 was up by 2.32% for month in local currency terms, excluding dividends. In the ensuring days it neared new record highs.

 

That combination of short-term fluctuations and longer-term gains, illustrates perfectly how “buying on the dips,” has been a winning strategy for investors in recent years. The S&P 500 has more than doubled during the past five years alone including a 9.18% jump since the start of 2014. The index also performed well over the past 10 and 20 year periods, both of which included substantial corrections.

 

Global economic uncertainty

Ironically, the recent run-up in stocks has come at a time of significant global uncertainty. In the United States, the Federal Reserve is ending its massive Quantitative Easing asset purchase program, which had been keeping interest rates low. This coincides with announcements that the European Central Bank and the Bank of Japan will heat up their own monetary easing to jump start their respective ailing economies.

 

Washington will also almost certainly be hit by increased gridlock following mid-term elections which gave the Republicans control of the Senate and increased their representation in the House of Representatives. These developments were however balanced out by White House bragging about the country’s 55 straight months of private sector job creation. That streak, which has added 10.3 million new posts, is the longest on record.

 

Those mixed trends are not surprisingly having a mixed impact on the Canadian economy and stocks, which like the S&P 500, have registered strong gains so far this year. For example the recent rise in the US dollar, has put considerable downward pressure on commodities prices, notably oil, which in turn has hit local natural resource exporters. On the other hand Canadian manufacturers are seeing their competitive positions strengthen south of the border, due to the weaker loonie.

 

Keeping focused on the long-term

The real takeaway from the recent market fluctuations though is not that investors should buy when the market dips. Far from it. Market timing remains a mug’s game and those who try it get burned more often than not. As Benjamin Graham, one of the fathers of long term investing and a mentor to Warren Buffet liked to say: "In the short run, the market is a voting machine but in the long run it is a weighing machine."

 

The more important point is that recent years have rewarded long-term investors who didn’t reduce their holdings when those dips occurred. They just kept their eye on steady long-term strategies. The key is recognizing that market corrections, even the most recent one are generally good things, as they enable investors to sit back and catch their breaths.

 

True, staying put, when there is turmoil all around is harder than it looks. However with fixed income securities generally paying negative interest rates in real terms (after taxes and inflation) there are few other obvious places to invest for the long-term.

 

peter@peterdiekmeyer.com

 

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