What Every Smart Investor Should Know about Market PullbacksOctober 29, 2018
Markets are plummeting. Traders are scrambling. And no is quite sure what to make of the pivot lower.
But one thing is for certain — It’s not time to panic.
“Indeed, a wall of worry has morphed into [a] towering wall of pain as extremely fragile circumstance across the capital markets continues to undermine investor confidence,” said Stephen Innes, head of trading at Oanda Corporation, as quoted by MarketWatch. “Markets continue to tremble but with traders suffering a severe case of the cold sweats as geopolitical risk runneth over, the unambiguous bias toward safe havens suggest the street is expecting this rout to deepen. In the absence of any tier one US economic to tether market sentiment, the bears are uncaged, and a bull is on the menu!”
All thanks to a mountain of worry from various sources.
Some believe the Federal Reserve made a mistake raising rates too fast, which will make borrowing much more expensive. Mid-term election jitters are also to blame. Economic growth is slowing in Europe and Asia. And then, of course, the tariff war between China and the U.S. hasn’t been well received. This is all happening in the worst month of the year, mind you.
However, we must remember that markets are resilient.
The last thing you want to do – especially now – is panic.
Any time the market goes haywire, remember these key rules from Warren Buffett.
Rule No. 1 — Have Cash on Hand
“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent,” Buffett says.
Rule No. 2 — Don’t Follow the Herd says Buffett
One of the key reasons that many investors under-perform in the market is because they move in and out of assets at the wrong time. Therefore, when an investor sees everyone else making money from rising markets, they tend to throw every spare dollar into their investments. Unfortunately, when that same investor sees a group of other investors selling, that investor sells too. According to Buffett, they are influenced by the herd mentality, which can be extremely damaging to a trading portfolio.
Rule No. 3 — Be in a Strong Position to Capitalize
With cash on hand (see rule #1), Buffett has the financial flexibility to take advantage of any opportunity to buy quality stocks at lower prices. As the billionaire often points out, keeping some cash on hand allows you to benefit from corrections without having to sell other investments from your portfolio.