What To Do When Bad Equals Good For Investors

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Summary

In the financial world, I think there are no bad events, just new opportunities.

The markets are currently betting that the Federal Reserve will respond to the economic slowdown by lowering short-term interest rates.

As last week ended, options being bought by small investors were overwhelmingly betting on a lower market.

By Jerry Wagner

They say a broken mirror earns you seven years of bad luck. That makes sense – something bad yields something bad.

Then why do we so often say in finance that when something bad happens, it is good for the markets? In fact, it seems that we will often go weeks, even months, saying bad news is considered good news for stocks?

I guess it’s like that old saying: “What’s bad for the worm is good for the bird.” The bad fortune of one turns into the good fortune of another. Life’s full of these little ironies.

In the financial world, I think there are no bad events, just new opportunities. If life gives you lemons, you make lemonade.

 

 

We all know that the stock market consists of both peaks and valleys (in fact, all markets do). Successful investors view the valleys as opportunity zones. As long as the valleys don’t turn out to be the Grand Canyon (deep valleys that can take ages to get through), you can do very well by buying on the bad news. This is the foundation of a whole school of investing – the value-investing credo of the would-be Warren Buffetts of the world.

Dynamic, risk-managed investing aims to help investors avoid the market’s “Grand Canyons.” And if the valley turns out not to be the Grand Canyon, dynamic, risk-managed investing seeks to keep you invested to gain the benefits of the ride up to higher ground.

Or, you could try another investment approach: buy and hold. This approach is based on the premise that the principal asset classes (stocks, bonds, and gold) make money over time. Therefore, you just have to invest, hold on, and enjoy the eventual benefits. However, when you drive down into that inevitable Grand Canyon (historically, they come along every 5 to 10 years on average), “buy and hold” forces you to stay the course despite the risk, taking potentially deep losses until the world rights itself again.

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