With today’s dip, is now the time to buy?
The S&P took a dip today as the impending rate hike looms over our shoulder. The expected 25-basis-point increase the Feds keep mentioning may be happening on December 15th afterall. Currently the market expects it with a 76% probability. The truth is, rates were low for a very long time due to quantitative easing. Money flooded the whole market elevating supply. Based on supply and demand principles, this made interest rates low.
Because the Fed plan to raise rates, stock prices dropped across the board. The reality is that the Fed will continue this for some time. This will cause the market to be shaky in the future. As a result, does it matter if you buy now or buy later?
So what will happen to our portfolios?
Well the short answer is that everything is already priced into the market. This Fed rate hike has been in “pending” for so long that the market expects it to happen sooner or later. The dip today creates a nice little holiday sale for those looking to contribute a little more into their portfolio before the historic Santa Clause rally, or even to top off their IRAs.
The ultimate answer is that it does not matter if you buy now or buy later. Ideally you would buy now and wait it out.
Here’s something else I want to bring to your attention:
Did you know that since 1926 to 2012, every 20-year period has provided a positive return? Allfinancialmatters.com did a study, adjusted for inflation, that points this out.
That means that since 1926, if you stuck your money into the market and took it out 20 years later, you’d always come out positive.
Last year, Warren Buffet said in his letter to his shareholders:
“Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.”
So I wouldn’t be worried too much about the Fed rate hike, or the market dip today. Over the course of the long run, the graph of market volatility smoothens out to a point where it isn’t risk. Remember that time in the market is much more important than timing the market.