Lessons from the Market

Lessons from the Market

February 07, 2022

I got an interesting text from my son a few days ago as the market was flashing red:

When should I throw everything into S&P 500. And leave it there till I’m 50.

There is a big word that that the talking heads on CNBC use when the market goes spiraling down.  It is called Capitulation.  My son was giving me a live look into someone who has given up hope on the stocks.  Just SELL!  This is the son that has done his fair share of trading various stocks and ETFs.  He will brag to me that he is up 600%  on a position, but will also level with me that when a trade goes south on him.  It has been a learning opportunity for him, but in the end the market always went up over the past 12 months he has been trading.  This volatility had him worried and beaten.  We talked through his comments and to some degree he is right.  He should be investing in the S&P 500 (and other diversified indexes) over the long haul.  However, if he enjoys the trading aspect then use a small portion of his account and see what opportunities the market is presenting to him.

Part of his pain was due to being in just a few individual stocks.  This gave me an opportunity to talk about the power of diversification.  A great example was shown last week.  Facebook was the 5th largest company in the market cap weighted S&P 500 last week before its poor earning results.  It “crashed” 26% that day wiping out more than $200 billion in equity from its shareholders.  That same day the S&P 500 as a whole was down 2.5%.  Not a great day, but not a catastrophe.  The next day Amazon reported great earnings and increased their equity by more an $200 billion 

Amazon and Facebooks results can show you why it is so hard to beat the market.  It is better to be in a well diversified portfolio.  That diversification covers Value stock and Growth stocks, Large Cap and Small Cap, US stocks and International.  By being diversified we are not in the best performing sectors of the market, but we are not in the worst.  We don’t want a single stock to take our portfolios down by 26% in a day.

Dinner plans on 2/8?  Once again I will be helping out with the United Way of the Kearney Area’s Dining Out.  My team will be at Joy’s Table from 5:30 – 8:00 being a waiter and collecting tips to support the various local agencies that the United Way supports.  I would be glad to see you there!