Another Market Panic

May 21st, 2010 by Potato

The S&P500 was down nearly 4% today, which is a pretty huge one-day move. We’re now below the point we were at two weeks ago before the Greek bailout package was announced (the close after the “flash crash”).

This is not purely out of partially-unfounded fears over what’s happening in Europe: some fairly bad news has been coming out of North America, including US numbers indicating that inflation has gone away, raising the probability that we are facing a protracted or double-dip recession.

So, what does that mean for the young investor? Periods of panic and weakness are generally good times to buy (or to choose to rebalance and shift more of your portfolio from strongly-performing safe assets to underperforming equities). However, in the past I’ve bought too early and used all my cash in the early innings. Since buying a car and paying rent at two places while I finish my PhD has lead to negligible savings, I don’t have any dry powder at the moment to invest. That’s forced me to sit on my hands through this and wait for some truly delicious bargains.

I am considering using some modest leverage if prices seriously decline (ala 2008/2009), though getting Wayfare to sign-off on that plan will be a challenge since she’s allergic to debt (she is also allergic to cats, so it’s nothing personal, debt). However, while I can appreciate the logic behind leverage (and bringing your future purchases forward if you’re young and saving), I’m also not one to get too comfortable with debt. Even if I maxed out my LoC, that’d only leave me about 7-8% leveraged.

The question then becomes, at what point do I start buying? When is it truly “raining gold”? I doubt we’ll go as far down as the March ’09 lows, but who’s to say how long or how deep this panic will run. The big bear lasted over a year; the two moderate corrections on the way up lasted about a month and were less than 10%. Some may argue that it’s better to wait for the bottom to be in and buy on the way up, and I don’t have a good comeback to that except to say that then it becomes easy to continue to sit on the sidelines until long after the bottom has passed. I’m not trying to get my timing perfect — I’m trying to tell myself I’m not timing at all — I just want to buy at a fairer price. So, I’ve got a few stink bids in now for a few stocks, sitting about 10% below where they are today (which for many is already 10-15% below where they were last month). After that, I’ll probably buy again when I save more money or if the market goes down another 10-20%…

The point to remember is that for many of us, this is a better time to invest than it was last month, despite the calm markets then.

Comments are closed.