It's been a brutal start for stocks in 2014, but when anyone evaluates it, it has to be looked at in the context of the last 13 months and the last five years. The stock market isn't a board game like Monopoly where somehow everything begins anew and all stocks are on the "GO" square ready for a roll of the dice. People keep asking "why is the market down so much...why is it crashing?" Well, it's down for the year, but in the grand scheme of things it's not an unreasonable pullback. Everyone knows the market goes up and down, but when it's down people make the worst case assumptions.
When it's up, many people fret it will ultimately come down. In fact, throughout history it has ultimately gone higher.
Yet the rapid pace of decline is alarming. For me, the faster the market comes down the better as we shake up weaker hands that will slow down rallies later and get price discovery, and then price distortion (read oversold stocks). As we approach the first correction for the Dow in more than two years beneath the surface, a gang of stocks have already "corrected" down more than 10% from their recent highs. The list published in USA Today, underscores the contrarian nature of the market. While money has been seeking safe havens, like bonds or bunkers like gold, as of late blue chip stocks have taken some of the worst beatings.
The Dow is the worst performing major index and more than half of S&P 500 is getting slammed.
The interesting thing about the table above is that there is a 99% chance none of these companies are going out of business. There is also a 98% chance all will at some point return to those high peaks from whence they've fallen. I'm by no means saying all should be held, but some should, and others maybe, jettisoned because the wait for them to come back would be too long and have the double whammy affect of missing alternative opportunities.
It's not easy to ride out, it's not easy to be down and it's not easy to take losses.
Thus far in 2014, we've been reminded that winters can be harsh and investing can be as well. At some point this year people will complain about how hot it is outside and muse about a little cold weather. While investors never muse about taking loses or seeing their portfolio get hit, there will be moments when we can look back on the start of the year with less frustration...if we don't make the wrong decisions during this critical moment.
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