“The true investor welcomes volatility… a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses”
– Warren Buffett –
As I’m writing this post for the blog, I’m watching the share price of one of the stocks I recently purchased soar. The thing is, on the same day I purchased the stock for $72.81, the share price dropped soon after I purchased it and the day after that it went down even further into the $66 range. I was bummed that I didn’t wait another day or two to buy it for cheaper but I also knew the stock jumped up from $24 to $103 on it’s IPO date a couple of weeks ago, so I held strong. Today as I’m writing this the stock price has jumped back up into the mid to high $90’s range and at one point traded at a day range high of $103.90.
If there’s one thing about investing that you need to take into consideration it’s the ups and downs of the market which is known was market volatility. This is where the weak hands get shaken out and strong hands add to positions on downward trends, also known as buying opportunities. Downward trends are where a lot of people make the mistake of panic selling and when the stock price recovers they end up regretting that they sold instead of riding it out.
Now, that’s not to say that selling on a downward trend is necessarily a bad thing either. Pending on the circumstances as to why a particular stock price or the market as a whole is dropping is taken into consideration. There are a number of reasons why a stock could be losing value.
- Negative earnings reports
- The change of upper management in a company
- A dividend cut
- Dilution of shares via the issuing of new stock
- Shorting of the stock
- Market uncertainty
- Economic shocks
Those are just a few off the top of my head, but the thing to remember is that before you make an investment, you should always do due diligence before you put your money into it!
The benefit to market volatility and why it’s your friend is because downward trends are buying opportunities for solid investments. Back in mid-march of 2020 in the midst of the covid 19 scare, there was a huge market sell off where the market as a whole crashed. All of the solid stocks like the FAANG stocks Facebook, Amazon, Apple, Netflicks and Google went on sale. A lot of other great stocks and ETF’s dropped as much as 50% at the time and have since recovered to their original pre-crash values.
The thing is, you have to know why you make a particular investment in the first place and realize there will be price fluctuations along the way. This is where dollar cost averaging can be beneficial as you add to your position over time. But you also have to endure the downtrends or be shaken out of your position by panic selling.
When making your investment, don’t try to time the market. Price ranges can swing wildly in just one day as in today as the perfect example. The stock price of the stock I purchased a few days ago has had a daily range today of $75.07 to 103.90 and has been swinging wildly since. So decide on a price that you’d like to buy at and set a limit order in hopes of catching it at that price. You can also sit and watch the price during trading hours and do a market order if the price range is to your liking.
To be clear, nothing is linear when it comes to investing in stocks. Over time, prices tend to gradually go up with solid companies, but in what are called trend channels. That’s a gradual upward trend that has pull backs along the way, but gradually makes higher highs and pull backs tend to drop back down to previous high levels before heading back up again. A bullish trend channel example below:
One last thing, always have an exit strategy in place when making an investment. whether it’s a long term hold or swing trade have a plan in place for how long you plan to hold it and what sell price you’ll liquidate at. For me, I’m rebuilding my stock portfolio for a 15-20 year buy and hold strategy. I’m willing to ride out price fluctuations and “buy the dip” on down trends a long the way.
As I like to always say… “the journey begins with the first step”.
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Until next time… be sure to comment below and let’s get some dialogue going. I’m curious to know what’s your investment strategy and time line?