To the moon (and back): what to do in down times
Article written by InvestNow – 3rd June 2022
More than two years after the COVID-induced market crash of March 2020 investors are squaring up to some new questions in a different kind of down.
The relentless negative trend has seen most share markets falling double-digits below the highs posted at the end of 2021.
Despite a healthy little bounce at the end of May, the main NZ share market index has shed about 15% year-to-date – on a par with losses reported by the broad US share benchmark, the S&P 500.
Elsewhere, the NASDAQ index – home to many of the pandemic-era technology stock favourites – has fared even worse, losing about a quarter of its value in just five months.
By the somewhat arbitrary standards of market consensus the NASDAQ is now in ‘bear’ territory (a sustained fall of 20% or more from peak) while the S&P 500 remains stuck in the -10 to -20% zone reserved for ‘correction’ status.
The broad market indices, though, conceal even worse results for some of the mainly technology-based stocks that soared in value as hordes of new investors rushed into online share-trading platforms. Crowd favourites such as Amazon, Tesla, Facebook (now called Meta) and Netflix have dropped much further than the average market.
Netflix, for example, saw its share price collapse by almost 70% so far this year; the harsh mathematics of market pricing implies that the company share price needs to rise 300% from here to reclaim its past high.
In a sharply divided debate, some seasoned market observers have ‘called the bottom’ while others warn of worse to come, presenting a strategic dilemma for stock-traders or even a crisis of faith for long-term investors.
Market volatility always highlights the importance of time-tested investment principles such as diversification, sticking to the plan and filtering out the ‘noise’.
Or in the new-fangled investing jargon favoured by ‘redditors’ and the like, in a bear market do diamond hands buy the dip or HODL to the moon? (The terms “HODL” and “diamond hands” have been explained at the end of this article).
In some respects the mantras bandied about on social media do mirror the more traditional concepts but, unfortunately, the old-school wisdom does not apply so well to investors betting on a single-stock or cryptocurrency to escape market gravity.
Bye-bye buy-the-dip
Dip-buyers have certainly had plenty of opportunity during the first few months of 2022 with share markets consistently offering low-low prices – albeit amid the odd spike upwards over the period.
Until the last week in May, for example, US stock indices were down week-on-week for an unbroken run of almost two months.
Buying the lows in expectation of a quick return to upward-trending markets would have proved challenging.
As one commentator on the popular Reddit website noted in relation to an earlier run on cryptocurrencies, shallow-pocketed bargain-hunters can have too much of a bad thing: “Slow down the dips I’m almost out of dip buying funds.”
The current slowdown is undoubtedly putting a strain on the only-way-is-up mentality of the many retail investors who jumped into share markets in the immediate aftermath of the early 2020 COVID-crash.
Indeed, buy-the-dip investors were handsomely rewarded post the March 2020 lows in what turned out to be the quickest market turn-around in history.
Writing on the one-year anniversary of the crash, Paul Kaplan, director research Morningstar Canada, noted: “After a decline of 20% (in real terms) from December 2019 to March 2020, the U.S. equity market fully recovered in just four months and was back to its precrash level by July, soon pushing higher.”
With perfect foresight, an investor could’ve bought the NASDAQ index at the March 23 nadir in 2020 and doubled their money by the end of last year: as at the end of May 2022 the same perfectly timed investor would be up a still healthy 50%.
Markets are clearly in a correction phase but no-one can accurately predict the next short-term movements or timing of any sentiment change. Historically, broad-based market benchmarks such as the S&P 500 have always bounced back (although the time taken to recover past highs can take years) but not all of the underlying stocks that make up the index may join in the resurgence.
Indeed, it is more than possible that some of the companies that have previously been market darlings with massively inflated prices may never revisit their former glory days.
How to HODL with (diversified) diamond hands
However, while the post-COVID market resurgence was energised by massive monetary and government stimulus, the easy-money era is now over.
Spooked by persistent high inflation, central banks are now hiking interest rates and governments face restraints on spending. As well as stoking geopolitical tensions, the Ukraine war has worsened inflationary forces and added further stress to already-stretched global supply chains.
Background economic conditions in June 2022 are a world away from the seemingly benign settings of even six months previously.
But should investors care?
“Obviously, the macro-economic backdrop affects all of us and will ultimately impact financial markets,” InvestNow founder, Anthony Edmonds, says. “But investors shouldn’t let short-term market noise drown-out their long-term plans. Of course, if the current period of sustained volatility and downward trends is proving too stressful then it might be worth revisiting your risk tolerance – or seek advice for reassurance on the probable long-term outcomes for your portfolio.”
And even some of the catchphrase-based financial advice popularised on social media actually has something useful to say to investors, Edmond says, in the right context.
“Online investment forums are peppered with sayings like HODL (hold on for dear life) and diamond hands – both essentially saying the same thing, which is don’t sell just because the market is volatile,” he says. “That’s really quite reasonable advice when applied a broadly diversified portfolio. But where the social media crowd often get it wrong is applying the sensible concept to single risky assets like an exotic cryptocurrency or a hot stock such as Tesla, for example – that’s just speculation.”
As many investors who sank their life savings into the recently defunct cryptocurrency Luna discovered, diamond hands can quickly turn to ash.
But ‘hodling’ a well-diversified portfolio of funds across multiple asset classes built according to an individual’s particular needs and risk tolerance is a core principle of good long-term investment, Edmonds says.
“Even buy-the-dip works better in a diversified portfolio sense if you take it to mean making regular contributions to your investment strategy through all market conditions,” he says.
“Dollar-cost averaging might not take you to the moon but it will definitely help you avoid the craters.”
Dimond hands and HODL terms:
On social media platforms, an investor is said to have “diamond hands” when they hold onto an investment no matter what. These investors don’t sell it regardless of volatility, losses or gains. Someone with diamond hands resists panicking when prices dip, but he or she also doesn’t get greedy when prices rise. The person is in it for the long haul.
“HODL” is a term derived from a misspelling of “hold,” in the context of buying and holding Bitcoin and other cryptocurrencies. It’s also commonly come to stand for “hold on for dear life” among crypto investors. This term has now been taken up for other forms of investment.
They don’t cave under pressure and sell their stocks, essentially.
To the moon (and back): what to do in down times
Article written by InvestNow – 3rd June 2022
More than two years after the COVID-induced market crash of March 2020 investors are squaring up to some new questions in a different kind of down.
The relentless negative trend has seen most share markets falling double-digits below the highs posted at the end of 2021.
Despite a healthy little bounce at the end of May, the main NZ share market index has shed about 15% year-to-date – on a par with losses reported by the broad US share benchmark, the S&P 500.
Elsewhere, the NASDAQ index – home to many of the pandemic-era technology stock favourites – has fared even worse, losing about a quarter of its value in just five months.
By the somewhat arbitrary standards of market consensus the NASDAQ is now in ‘bear’ territory (a sustained fall of 20% or more from peak) while the S&P 500 remains stuck in the -10 to -20% zone reserved for ‘correction’ status.
The broad market indices, though, conceal even worse results for some of the mainly technology-based stocks that soared in value as hordes of new investors rushed into online share-trading platforms. Crowd favourites such as Amazon, Tesla, Facebook (now called Meta) and Netflix have dropped much further than the average market.
Netflix, for example, saw its share price collapse by almost 70% so far this year; the harsh mathematics of market pricing implies that the company share price needs to rise 300% from here to reclaim its past high.
In a sharply divided debate, some seasoned market observers have ‘called the bottom’ while others warn of worse to come, presenting a strategic dilemma for stock-traders or even a crisis of faith for long-term investors.
Market volatility always highlights the importance of time-tested investment principles such as diversification, sticking to the plan and filtering out the ‘noise’.
Or in the new-fangled investing jargon favoured by ‘redditors’ and the like, in a bear market do diamond hands buy the dip or HODL to the moon? (The terms “HODL” and “diamond hands” have been explained at the end of this article).
In some respects the mantras bandied about on social media do mirror the more traditional concepts but, unfortunately, the old-school wisdom does not apply so well to investors betting on a single-stock or cryptocurrency to escape market gravity.
Bye-bye buy-the-dip
Dip-buyers have certainly had plenty of opportunity during the first few months of 2022 with share markets consistently offering low-low prices – albeit amid the odd spike upwards over the period.
Until the last week in May, for example, US stock indices were down week-on-week for an unbroken run of almost two months.
Buying the lows in expectation of a quick return to upward-trending markets would have proved challenging.
As one commentator on the popular Reddit website noted in relation to an earlier run on cryptocurrencies, shallow-pocketed bargain-hunters can have too much of a bad thing: “Slow down the dips I’m almost out of dip buying funds.”
The current slowdown is undoubtedly putting a strain on the only-way-is-up mentality of the many retail investors who jumped into share markets in the immediate aftermath of the early 2020 COVID-crash.
Indeed, buy-the-dip investors were handsomely rewarded post the March 2020 lows in what turned out to be the quickest market turn-around in history.
Writing on the one-year anniversary of the crash, Paul Kaplan, director research Morningstar Canada, noted: “After a decline of 20% (in real terms) from December 2019 to March 2020, the U.S. equity market fully recovered in just four months and was back to its precrash level by July, soon pushing higher.”
With perfect foresight, an investor could’ve bought the NASDAQ index at the March 23 nadir in 2020 and doubled their money by the end of last year: as at the end of May 2022 the same perfectly timed investor would be up a still healthy 50%.
Markets are clearly in a correction phase but no-one can accurately predict the next short-term movements or timing of any sentiment change. Historically, broad-based market benchmarks such as the S&P 500 have always bounced back (although the time taken to recover past highs can take years) but not all of the underlying stocks that make up the index may join in the resurgence.
Indeed, it is more than possible that some of the companies that have previously been market darlings with massively inflated prices may never revisit their former glory days.
How to HODL with (diversified) diamond hands
However, while the post-COVID market resurgence was energised by massive monetary and government stimulus, the easy-money era is now over.
Spooked by persistent high inflation, central banks are now hiking interest rates and governments face restraints on spending. As well as stoking geopolitical tensions, the Ukraine war has worsened inflationary forces and added further stress to already-stretched global supply chains.
Background economic conditions in June 2022 are a world away from the seemingly benign settings of even six months previously.
But should investors care?
“Obviously, the macro-economic backdrop affects all of us and will ultimately impact financial markets,” InvestNow founder, Anthony Edmonds, says. “But investors shouldn’t let short-term market noise drown-out their long-term plans. Of course, if the current period of sustained volatility and downward trends is proving too stressful then it might be worth revisiting your risk tolerance – or seek advice for reassurance on the probable long-term outcomes for your portfolio.”
And even some of the catchphrase-based financial advice popularised on social media actually has something useful to say to investors, Edmond says, in the right context.
“Online investment forums are peppered with sayings like HODL (hold on for dear life) and diamond hands – both essentially saying the same thing, which is don’t sell just because the market is volatile,” he says. “That’s really quite reasonable advice when applied a broadly diversified portfolio. But where the social media crowd often get it wrong is applying the sensible concept to single risky assets like an exotic cryptocurrency or a hot stock such as Tesla, for example – that’s just speculation.”
As many investors who sank their life savings into the recently defunct cryptocurrency Luna discovered, diamond hands can quickly turn to ash.
But ‘hodling’ a well-diversified portfolio of funds across multiple asset classes built according to an individual’s particular needs and risk tolerance is a core principle of good long-term investment, Edmonds says.
“Even buy-the-dip works better in a diversified portfolio sense if you take it to mean making regular contributions to your investment strategy through all market conditions,” he says.
“Dollar-cost averaging might not take you to the moon but it will definitely help you avoid the craters.”
Dimond hands and HODL terms:
On social media platforms, an investor is said to have “diamond hands” when they hold onto an investment no matter what. These investors don’t sell it regardless of volatility, losses or gains. Someone with diamond hands resists panicking when prices dip, but he or she also doesn’t get greedy when prices rise. The person is in it for the long haul.
“HODL” is a term derived from a misspelling of “hold,” in the context of buying and holding Bitcoin and other cryptocurrencies. It’s also commonly come to stand for “hold on for dear life” among crypto investors. This term has now been taken up for other forms of investment.
They don’t cave under pressure and sell their stocks, essentially.
Leave A Comment