Stock markets have had a rough 12 month. From mid April of last year to today, mostly all stock market indexes are down. This had been as a result of a barrage of bad news – the slowdown of China, falling energy and commodity prices and an interest rate hike for the fed. But the fall in stock prices is not all too do with the bad news,
Regardless of whether this stuff is just noise or actually ends up sending the markets right down, eventually the stock market will crack and have a correction. It is no surprise that stock markets have fallen or in more technical terms had a ‘correction’ as the markets were highly overvalued last April; at least judging by the Cape-Shiller Index and the Warren Buffet Index. A correction is always healthy and is avoids people buying equities at overvalued levels. Remember the dot com bubble!
Whilst the mainstream media seems to obsess that a stock market crash is bad news as it reduces your paper wealth, I on the the other hand hold a different view. I think that a stock market crash is good for anyone still in the asset accumulation phase of their lifecycle. This is because you are able to get stocks at cheaper prices than you would have done before and thus you can buy more stocks for less money. Think about it this way, if your favourite shoes went on sale, would you moan or would you jump for joy knowing that you get to pay less for it? Same thing applies to stocks, you should jump for joy when you are able to buy stocks in your favourite company for cheaper, provided the fundamentals are still in tact.
So here is a list of people I think would benefit from a stock market dip:
- Anyone in the asset accumulation phase of their life cycle and whom will be a net saver in the coming years – If you are in the asset accumulation phase of your life i.e. not in or near retirement, you should cheer for lower stock prices. As mentioned above, lower stock prices gives you the ability to buy a greater ownership stake in companies than you would have if the stock price was high.
The earlier a correction happens in your life-cycle, the better. Millennial’s should be particularly pleased with any stock market pullback. By buying stocks at attractive valuations so early in life, they are able to compound their wealth at greater rates than they would have done if they bought assets at overvalue.
- Investors with a time horizon that extends beyond 5 years – Time in the market is a wonderful thing. Generally, the longer you are invested in the market, the greater the chances are that your investments will be profitable. This article by Hargreaves Lansdown illustrates this point beautifully.
- Gold bugs – As the price of gold will surely rise the more unstable markets become. Gold has already returned 16.8% in 2016!
- Risk Averse investors – This may sound strange but if the general stock market takes a plunge, good stocks are taken down with bad stocks. It is in these times that investing is ‘less risky’ as you can buy wonderful stocks with a greater margin of safety. Just look what happened to stocks of wonderful businesses in 2008. Anybody who bought them during that downturn has done extremely well due to the upside of owning these businesses at attractive valuations being far greater than any downside.
So if you are a low risk taking investor and currently hold your portfolio in cash and bonds, a stock market rash should work out for you as you can go shopping for bargains.
If you truly understand how the markets work and you really want to build long term wealth, a stock market decline is on of the best things that can happen. This is because you will be able to buy stocks for cheaper and when the markets recover, you will be thankful that you had the chance to buy stocks at wonderful prices!