Buy On The Stock Market Corrections & Pullbacks

MSCI World Index

A Missed Opportunity To Buy On The Last Stock Market Correction

It was the start of 2016 that we last had a stock market correction. Stock market corrections are technically a temporary pullback of 10% or more. Fear took over the market and most investors lost money during the month of January. There were concerns over the state of the global economy, fears about the crash in oil prices which dipped below $30 and turbulence in China.

It was one of the worst starts to any stock market year. The Dow index had plunged 1437 points in just the first two weeks of the year. Most investors were fleeing to safe haven assets such as bonds, cash and even gold which had one of it’s best runs in recent years.

There Is An Imminent Stock Market Crash Coming…Sell!

Economists and traders are constantly calling out imminent stock market corrections and crashes. They have been for the last few years especially due to the historically high levels reached in the stock markets. Of course, I suspect that one day they will be right! Going by the Cyclically Adjusted Price Earnings ratio chart below, it’s obvious at first glance that the US market at least, is expensive.

If you had just sat on cash for the last few years however, you would have missed out on some exceptional returns. Just look at the MSCI World Daily Performance chart above and you’ll see.

Global Cape Ratio Heat Map - 31 March 2017
Global Cape Ratio Heat Map

The interactive version of the above chart is available from Star Capital.

Ignore All The Noise

Of course, as a long term investors, we should actually see these dips in the stock market as buying opportunities. The great investing guru Warren Buffett once quoted “Be greedy when others are fearful and fearful when others are greedy”.  Now, of course, you can only buy on the dips if you either have cash available to invest or other assets such as bonds, property or gold that you are wanting to use to re-balance a diversified portfolio. Even having just a basic diversified portfolio split between equities and bonds or equities and cash that re-balancing really comes into it’s own

I’m all for having a diversified portfolio, especially when stock markets are near their historical highs, such as right now (at time of writing). However, for me personally, I would prefer to be 90-100% invested in equities post a 20% correction.

We had a stock market correction so why didn’t I re-balance my portfolio?

As you can see from the Assets and Liabilities statement below, I was holding a mixture of cash, gilts, bonds and property during the start of 2016. The reason for me originally diversifying my portfolio this way was because I didn’t want to hold too much cash. Cash doesn’t earn money. For me, being diversified this way was a tactical solution whilst I waited for the opportune time to go all in to equities. My risk profile and investing time horizon means I am happy to be invested in equities and take the rough with the smooth. I know full well that over a 10 year time period, I should come out intact the other end. At least that’s what history suggests and as that’s all I have to go on. That’ll do.

It was this precise moment that I should have practiced what I preached. This was my moment to throw all my chips on the table. So why did I not act? At the time, I thought I knew equities were overvalued and I thought the market had further to go down. My judgement was clouded by all the media noise, for which I should know better and filtered out. I should have been contempt with the pullback and acted on technical analysis. Instead, before I knew it, we were back on the road to recovery with me, whining to myself that equities are just way too expensive….

Assets & Liabilities on 24th March 2016

 


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