As everyone is freaking out about stocks falling, a buying opportunity has presented itself:
The pattern now is reminiscent of the selling in late 2011 which, in retrospect, was a good buying opportunity as the market proceeded to rally another 70%.
The big concern right now is over supposed economic weakness in China. But aside from that, there aren’t any new developments in the US economy to justify another bear market, or at least nothing in the data has meaningfully changed between today and a month ago when the market was 12% higher. 99% of what’s said by the financial media is just rumors and fear intended to boost advertising dollars and ratings. The doom and gloom media is trying to create narratives when, in fact, most of this selling has no underlying structural cause and is just noise. Capitalism is not dying. Economically, China is still doing better than the vast majority of emerging markets. Stock prices of high-IQ companies like Amazon, Google , Facebook, and Tesla will keep rising. Consumers will keep consuming. Valuations for Uber and Snapchat will not fall. Bay Area homes will keep being expensive , including my neighborhood where prices keep going up.
As for myself, my stock account is negative for the year, so it’s not like I can pretend to be unharmed in all of this, although I only keep some of my money in stocks. Deeply regretting not buying TQQQ on the dip at $75 couple days ago, and it’s now at $91. Had I done some things differently, I would have about $2,000 more dollars now on the account, and while it isn’t that much money, it’s still a personal failure on my part in not choosing the better trade. Yeah, they say the grass is always greener ….blah blah, but I want to get to the point where every decision is an optimal one.
If you have a sizable sum of money, Bay Area real estate may be better than stocks. You get a much smoother rate of return. But that’s not an option for the vast majority of people, since the homes in that region are expensive and scarce. That’s the ‘depressing’ reality about investing: the easier it is to invest in something, typically the worse the returns for the average person. A lot of people who buy stocks lose money; there are too many stocks and sectors to choose from, and most of them are bad. To bypass this inherent difficulty of choosing stocks, it’s recommended buying index fund ETFs or sector ETFs, which are described below.
As mentioned before, my favorite sectors:
Retail (XLY,RETL,RTH)
Healthcare (XLV)
Large-cap technology (QQQ)
Payment processing (Mastercard, Visa, Paypal; there is no ETF for these)
Least favorite sectors:
Energy (XLE)
Commodities (GLD,USO)
Emerging markets (EEM)
Miners, oil shippers, and drillers (Misc.)
Emerging market currencies & bond funds (Misc.)
Junk bonds (JNK)
High yield misc. funds (MORL)
These sectors to to be macro-sensitive, meaning that they are susceptible to changes in the US dollar or emerging market GDP growth. These sectors also have too much volatility and poor returns. A junk bond can pay 7%a year, but the volatility is too high for a small return that can be erased in a few weeks of bad trading.
30-yr Treasury bonds (TLT)
Treasury bonds are also pretty good, since the weakness in China and the overall stock market malaise will delay any rake hike until 2016. A lot of people, who don’t how bonds work, don’t know the difference between a treasury bond and a junk bond. A high yield or risky bond* is a ‘risk-off’ asset, meaning it generally does badly during periods of economic weakness or fear. This is due to the flight to safety, which causes people to move money out of riskier assets into safer ones such as short-term government debt. A treasury bond is the opposite : they tend to do well during periods of panic, so if you plan on diversifying or hedging by buying bonds, make sure you are buying the right kind. When there is a flight to safety, money goes out of riskier junk bonds and into the safest ones of all: treasury bonds.
* this includes junk bonds, leveraged bond funds, emerging market bonds, REITs,