The volatility in the stock markets is remarkable. Companies such as Facebook, Netflix, PayPal, or the household goods manufacturer Clorox quickly fall by 15, 20, or 25 percent in a single day. Stock market values of billions of dollars evaporate within a few hours. On the other hand, we see many cheap stocks like 3M, Unilever, or T. Rowe Price Group.
Stress on the stock markets – tranquility in a diversified portfolio
With Facebook, one of my stocks has also been hit. Sure, it hurts when the value of individual holdings drops by more than 20 percent within hours. But these are things that are part of investing. The share price is like a rollercoaster. It goes up and down.
I go shopping, 3M looks cheap
Many investors find this too much action. They prefer things to be calmer without these eruptions and volatilities. I, on the other hand, like these price movements. They are healthy and open up good opportunities to buy shares at a lower price. It is even possible to lay the foundations for future wealth in crises or recessions.
Currently, I am on the verge of increasing my 3M holding. The stock is suffering a bit from some legal disputes. The P/E ratio is below 16 (historically, it has been above 19). The dividend yield is also juicy at 3.7 percent (payout ratio below 60 percent). In addition, management has stepped on the gas and reduced debt. I will certainly buy more shares here shortly.
Unilever, T. Rowe Price Group – cheap stocks look attractive
Other dividend pearls do not look too expensive at the moment either. Unilever has lost more than 25 percent from its historic highs and is finally fairly valued again. Growth has slowed, and management makes a relatively poor impression. Conversely, the dividend yield is close to 4 percent. Indeed, the share price looks battered. Unilever needs to transform itself much like Procter & Gamble did a few years ago. That may take years and weigh on the share price for a while.
T. Rowe Price Group has also been badly hit. The stock has lost 34 percent of its value. The stock now has a P/E ratio below 12. Even without special dividends, the dividend yield is now over 3 percent (the payout ratio is below 40 percent. In addition, the company is debt-free.
Volatility leads to market shakeout
Correction phases or bear markets are an excellent opportunity to go bargain hunting and buy cheap stocks. In addition, such volatility leads to a market shakeout. Air escapes from bubbles, and even newer investors learn (the hard way) that stock markets are not one-way streets and that constant price growth is not guaranteed. This leads to a little less euphoria and more rationality.
Therefore, volatility is good in the long term
So we can expect that the money will sit a little tighter with all investors. Accordingly, they will look more critically at companies with low growth, poor balance sheets, and unsuccessful management. In my view, this is also a good thing, even if it will lead to poor performance for many stocks. But we need critical investors who do not blindly buy every company for lack of alternatives and FOMO. Bad companies have to be able to go bust once in a while.
In such phases, it is probably best for investors to stay calm. Those who have invested broadly or have invested in an ETF are likely to have only marginally noticed the latest capriciousness. Alphabet’s market cap gains have largely offset Facebook’s losses. Traditional oil companies have also given shareholders a lot to cheer about in recent months. Diversification is, therefore, a means of smoothing out volatility and sleeping more soundly.
Expression of uncertainty, doubt, and stress
But the capers on the stock markets are also an expression of uncertainty and doubt. They can almost be described as stress responses. The background to this is the slowly but surely changing interest rate environment and the change in liquidity. Over the next few months, central banks around the world will curb or end their bond purchases and, at the same time, begin to raise interest rates.
This environment will be difficult for bonds. Just recently, the yield on a ten-year U.S. bond rose to just below 2 percent. Therefore, investors will ask themselves why they should invest in companies with weak growth and a dividend yield of 2.5 percent when they earn almost as much on a bond.
Time to observe yourself
In addition, a good opportunity has now come to observe yourself and your portfolio. My portfolio moves more or less with the market. The main reason is my diversification. Have more than 60 stocks from many market segments and different nations. As in the COVID-19 Crash 2020 or previous volatility periods, I have not significantly under- or overperformed. This gives me peace of mind because it puts me in the same boat as the broader market.
In this respect, it helps to know that even the super-rich suffer decent losses in crash phases. That’s what Forbes wrote in the 2020 stock market crash:
“The richest people on Earth are not immune to the coronavirus. As the pandemic tightened its grip on Europe and America, global equity markets imploded, tanking many fortunes. As of March 18, when we finalized this list, Forbes counted 2,095 billionaires, 58 fewer than a year ago and 226 fewer than just 12 days earlier, when we initially calculated these net worths. Of the billionaires who remain, 51% are poorer than they were last year. In raw terms, the world’s billionaires are worth $8 trillion, down $700 billion from 2019.”
In a crash, it helps to observe yourself. Are you more risk-averse than you think? Do you get caught up in fear of loss? Or are you calm and wondering about all the doomsday scenarios in the news and on Twitter?
Careful, that was not a crash yet
We are still absolutely close to the historical highs. Stocks worldwide may fall by another 20, 30, or even 40 percent. It’s all happened before, and there’s no reason to believe that we won’t see a crash in the future that’s more severe than 1929 and the years that followed—a years-long drawdown accompanied by economic difficulties, recession, high unemployment, and an increase in poverty.
From my point of view, the current developments and the usual risks are no reason to turn one’s back on the stock markets. But such turmoil should give reasons to review personal risk management. Investors looking at deep red figures of minus 30 or 40 percent must therefore question their investment style and strategy. Is this what they have factored in as a possible downside risk? Can they deal with it and still sleep soundly at night?
Have investors done their homework?
Those who act with conservative risk management have done their homework. There are many pillars here, and many investors value them differently. From my point of view, they are all essential and should be deeply embedded in the investor’s mindset.
- I try never to lose sight of active income and its development. The pandemic is shaking up a lot of things. Home offices are becoming common. Working remotely is no longer an obstacle. For many professions, this creates new opportunities for personal development. The labor market is turning around. There is a shortage of workers in many areas, finally changing the balance of power in favor of employees. Especially in rather low-paid professions, this can open up new opportunities for further training and salary increases.
- The market value of one’s assets should increase continuously. Additional investments can ignite the booster. Time is also an investment that should generate a certain return of investment. This return does not have to be material but can also bring emotional returns. Walking with friends in nature can cause a more significant return than watching the latest stock video on YouTube or reading annual reports or this blog post.
- Broad diversification is essential. This applies to capital as well as non-capital assets such as friendships, acquaintances, interests, etc. With diversification, we provoke serendipity and enter the sphere of happy coincidences.
- I stay positive and ignore crash prophets. They are like a broken clock, correct from time to time, and from time to time, it may be fun to listen to them if you have a stable mindset and want to be triggered. But actually, those people are simply negative people who deny a basic facticity of history: They deny progress. Therefore, I keep a healthy distance from them mentally.
- Last but not least. A healthy life away from the stock markets is a critical point. Sports and a healthy diet should be equal next to the above bullet points. Drinking cola every day would not work for me. Mental health is also an important aspect. This includes not letting yourself be pressured, not having unrealistic goals, and not viewing your wealth management as a race against others but rather as a lifelong marathon that takes you to the most beautiful and relaxing places in the world.