No doubt the week has been emotionally difficult for investors. The market usually has a 5% drop three times a year, a 10% drop about once a year, a 15% drop every two years, and a 20% drop every three years. Last year we experienced our 15% drop and now this year we have seen our 10% drop. Many ask, “What has changed?” and the answer is perception. We are only down 2.98% from the beginning of the year; however, we are down near 12% from the market high from April.
We see how actions in Washington, D.C. are driving companies not to hire. People are really worried about regulation and uncertainty on Capitol Hill, and the current round of negotiations has not helped. The Patient Protection and Affordable Care Act (Obamacare), the Dodd-Frank Wall Street Reform and Consumer Protection Act and the recent debt ceiling bill have thousands of pages, but few know exactly what they say, much less what the overall cost will be. Thus, businesses are concerned.
To provide you with some perspective, let’s look at some information from an August 1st article from The Wall Street Journal, “Sea Change in Map of Global Risk”:
Many so-called emerging countries, which have typically been charged higher interest rates because of their perceived risk, are now paying as little to borrow as developed nations, if not less.
The article cites Mexico’s benchmark 10-year bond yielded around 4% and Brazil’s 10-year debt yielded 4.18% during the past month. The U.S. 10-Year Treasury bond yields 2.53%. So when given a choice between Mexico’s, Brazil’s or the United States’ 10-year debt, compared to McDonald’s stock, which generally pays a dividend around 4%, we have to ask, “Where would a savvy investor want to put his money?”
The article continues:
In the thinly traded market for credit-default swaps, the cost of insuring €10 million ($14.4 million) of U.S. Treasurys for one year hit €80,000 ($115,000) on Thursday. By comparison, the cost of insuring a similar amount of Brazilian bonds for a year was $45,000.
Why would anyone insure something for 0.8% if your profit was only 0.8%—unless they expect the insurance contract to increase in value.
What we are trying to get at, is that savvy investors do not allow emotions to get in the way of their investments. We have said over and over that money is green and not red or blue. We understand the political fights going on, but the reality is, people are not going to stop investing.
Our clients continue to dollar cost average into the market, which generally provides better returns. The tendency is for the market to increase in value. But even as our clients dollar cost averaged into the market over the last 10-years—which were some of the worst years for the market—many saw positive actual returns in their portfolios, plus what they received in dividends.
When the Dow was near 12,800, we pulled the trigger and sold stocks to buy bonds for many clients who were within their 10-year window for liquidity needs. The general attitude at the time was, “Why would I want to sell if the market is going to continue to go up?” However, we ended up locking in 10-year liquidity at a much higher interest rate than we can get today. Likewise, if you think the market is headed back to 6,000, you are thinking, “Why would I want to buy?” You have to remember, you do not invest for tomorrow, you invest for 10, 15, 20 years from now.
With this week’s pullback in the market, it may be time to buy. If you have money you are dollar cost averaging in, the downturn provides a good buying opportunity.
At Henssler Financial, we believe you should Live Ready. This means taking advantage of market fluctuations by dollar cost averaging and getting more for your money during market dips. If you have questions regarding your investments the experts at Henssler Financial will be glad to help. You may call our experts at 770-429-9166 or e-mail at [email protected].