This is the inaugural episode of our “Certified Financial Poetry” series.
Click on the image above to watch the video of Steve’s first reading.
Poetry and Emotion
by Steve Wolff
What a difference a week can make, With the market’s give and the market’s take, Last week investors were all in a tizzy, Market volatility made them Maalox dizzy. Down 3, down 6, down 10 percent, wow! Is this the big break of the index called Dow?
A feeling crept in, it felt somewhat manic, As we sat on the edge of a slight bit of panic, Should I buy?, should I sell? What should I do? It seems all my stocks have contracted the flu.
But here we are now, just 7 days hence, We’ve made back some dollars and most of our cents, Emotions can take us in all sorts of directions, Especially when it comes to unfriendly corrections.
I’m reminded of wisdom by Alfred E. Newman, From Mad Magazine, he shines a bright lumen, When adrenaline pumps through your body so strong The decisions you make will most likely be wrong, So always stay calm and don’t be in a hurry, And as Alfred once stated, “What, me worry?”
Steve Wolff is a Financial Advisor and Managing Partner at WWM Financial in Carlsbad California.
Now for the understatement of the day…volatility has returned to the stock market.
Why has the stock market gone down with such force in the last week? I think there are a few reasons.
Profit taking. Stocks had run up extremely quickly over the last year or so, especially in January when the indices were up by around 8%. So it is normal for profit taking to occur.
Rising interest rates. Some investors have been spooked by the rise in interest rates. The 10-year government bond has risen to around 2.9%. They also believe the Federal Reserve is going to raise rates 3 or 4 times this year. When interest rate on bonds get high enough, they are competition for money that is now in the stock market. So the people who worry about this decided to sell some of their stocks.
Forced Selling. Perhaps the main reason for the stock market dive has been caused by hedge funds and others who invested in something called the VelocityShares Daily Inverse VIX Short Term Exchange Traded Note (and other securities like it). It is a security that bets on the volatility of the stock market. This is a highly leveraged security that is great when there is no volatility in the market.
Unfortunately, the spike in volatility in the market has caused some of these Exchange Traded Notes (ETNs) to nosedive by as much as 80%. Because they are leveraged, the hedge funds and other investors were losing a fortune and had to cover their margin calls. How do they raise money to cover the margin? They sell stocks that they own. This is what’s known as forced selling and it is happening in spades.
Are We in A Bear Market?
Does this indicate the start of a bear market? I don’t think so because the earnings that companies just reported were pretty good. Nothing has changed with the economy in the last week, just the price of stocks.
We might be in for a few more days of this until the forced selling abates. I do not believe this is the time to do any wholesale selling because the economy is still good. The tax cuts haven’t even started to kick in yet.
The advice from us is to sit tight, stay calm and if you have the cash be ready to gobble up some good stocks that continue to be forced lower.
As always, we are here for you, so if you have any questions, do not be afraid to contact us.
You can reach us at 760-692-5190 or Steve@WWMFinancial.com
Since 1986, when I started as a financial advisor, I have heard many people say they don’t really need an advisor, or they don’t think the money they might pay an advisor is worth the cost.
Well one of the reasons we believe that most people should use a financial advisor is investor performance. A good financial advisor will give guidance to people that might keep them from making those untimely mistakes that make it very hard to recover from.
Because human behavior is what it is, most people when left to their own devices, without someone to guide them, tend to make the wrong decisions at the wrong time. We have proof of that, but I’ll get to that in just a second.
Why do people make the wrong decisions at the wrong time? It’s pretty simple. They let their emotions rule their rational thought.
And there is science behind this. There is this ancient little part of your brain called the amygdala, that starts firing when you sense danger. Like how you feel when the stock market is crashing. The amygdala is saying run, it’s the saber tooth tiger all over again.
Without an advisor to tell you to stay calm, most investors head for the hills at the wrong time.
But you don’t have to take my word for it, just take a look at some of the studies. For instance, there is a study from the Morningstar company, the company that studies mutual funds, that shows that most mutual fund investors actually did far worse than the mutual funds in which they were actually invested.
Let me repeat that… most mutual fund investors actually did far worse than the mutual funds in which they were actually invested.
We have an article from Morningstar, that’s a couple of years old now, but proves the point of how investors really perform. Send us your e-mail address and we would be happy to forward it on to you.
We think with good guidance from an advisor, there is far more likelihood that you will stick with your investments and meet your financial goals.
This is just one reason why we believe most people should use a financial advisor.
