The former need to be avoided, while the latter create opportunity
Last week we wrote about the need to avoid permanent losses when investing. The problem with temporary losses is that they can feel very permanent during the process. So how do we tell the difference?
Most often these short-term losses can be thought of as collateral damage. The entire stock market falls for some reason and good companies are taken down with the rest. Investors are not helped by the media who need to report a “reason” behind every price change. Falling prices means there must be some bad news somewhere, and they can be counted on to find it.
So what could cause a market correction in the next few months?
Assuming one comes along, the culprit could be the dollar’s strength and energy weakness. The two together could produce low, to zero, growth in earnings for the market as a whole. Exporters earnings will be hurt by currency losses and earnings estimates for the energy sector have already collapsed.
As someone recently said, “The market is going to have a hissy-fit when it discovers that earnings might be down in 2015.”
The good news is that both these triggers are actually one time events. The dollar rally will probably have run its course in the next 12 to 18 months and energy earnings can only go down once. Even if 2015 turns out to be a wimpy year for company profits, the resulting market correction could be short-lived as earnings recover in 2016. Keep in mind that by “short-lived” we mean three to six months, not three to six days!
Suffering through temporary losses is part of the “cost” of passive investing. Without them investing would be so easy that any chance for significant gains would be priced out of the system. So as hard as it is to watch values fall, we should recognize corrections and other price disruptions as the opportunities that they are.
Daniel A. Ogden