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January 20, 2016

Markets Down More Than 8% To Start 2016! What's Next?

By Matt Thalman, INO.com

Buy! Buy! Buy!

We have all heard the saying, buy low, sell high, which is an easier to understand saying than Warren Buffett's famous quote, "Be fearful when others are greedy and greedy when others are fearful."

With the major US indexes all down more than 8% to start 2016, it would appear this is the time to follow the above-mentioned advice. Stock prices in general, based on the major indexes are 8% cheaper than they were just half a month ago, hence, buying today is buying low. Buffett's advice follows that idea and tells us to be greedy when others are fearful. The market is moving lower, indicating that the majority of investors are fearful of where stock prices will be in the future. If we follow Buffett's advice, this is a good time to be greedy.

I know what you are thinking, can't prices go lower from where they are today, giving you an even better opportunity to 'buy low' in the future. Yes, that obviously could happen.

But again I go back to Buffett's advice. Others are fearful today, which may not be the case tomorrow. The markets can and often do quickly turn. Furthermore, while picking the true bottom of a bear rally can be done, (just like winning the Powerball jackpot,) the odds of doing so are not in your favor. Buy today understanding that prices could move lower in the future, which would give the opportunity to buy even more at an even cheaper price. (This is one reason many investors buy small amounts over a period of time, rather than just one big all-in purchase.) But, if you don’t buy today because you fear prices will move lower and they don't, you will miss out on a great buying opportunity altogether.

So now that you have decided you are going to buy stocks today, what should you be buying?

Well, that’s simple, the same things you wanted to buy a few weeks or months ago when prices were higher. So if a few months back you liked high fliers such as Netflix (NFLX), Amazon.com (AMZN), or Tesla (TSLA), then you should be buying those stocks. If you are more of a stable growth, dividend focused investor, than buy dividend stocks. But, remember to keep in mind that you should be buying the same types of stocks you would have bought a month ago. Don't let your emotions take over and fear drive you're investing. If you don’t normally buy "safe" stocks, don't buy them now. Stick to your investing style and thesis.

With that all being said, investing in funds, specifically ETF's can be very helpful at a time when the markets are tumbling as we are they currently experiencing. A fund will protect your portfolio from single stock risk, which is, even more, important if you are a growth investor since during recessionary periods high price to earnings stocks typically get hit the hardest. 

Stock & ETF Trading Signals
The first option which will cover every type of investor is my personal favorite ETF, the SPDR S&P 500 ETF (SPY). The SPY is a low-cost ETF that simply tracks the S&P 500. Buy one share of SPY and you essentially own a little portion of each of the S&P 500 stocks. The SPY is a great option for beginner investors or seasoned pros, as well as investors looking for growth stocks or just looking for a solid dividend play. Yielding just slightly more than 2%, the SPY will provide income for seasoned and dividend focused investors, regardless of what the underlying stocks are doing. As for the new and growth investors, the SPY will help you get your feet wet in the markets without having to worry about massive double digit daily moves, while still giving you reliable long term growth rates (average annual return for the S&P 500 since inception in 1928 till 2014 is 10%).

But, maybe you are looking for an investment with a little higher dividend yield than just 2%. Options such as the iShares Russel Top 200 Value ETF (IWX), Schwab US Large-Cap Value ETF (SCHV), or the iShares Morningstar Large-Cap Value ETF (JKF) will all provide higher dividend yields, ranging from 3.16% down to 2.85%, but still put investors in reliable, safe, stocks. All three of the ETF's above focus on holding large capitalization stocks, based in the US which are considered to be value stocks. This will rule out the high P/E, fast growth stocks that could be very badly burnt if the market sell-off continues.

On the other side of the coin, investors looking for the high fliers that perhaps have been beaten down unfairly can invest in ETF's such as the iShares S&P 500 Growth ETF (IVW), the SPDR S&P 500 Growth ETF (SPYG), or the iShares Russell 1000 Growth ETF (IWF). All three of these ETF's have the same top five holdings; Amazon, Apple, Alphabet, Facebook, and Microsoft. As I have noted above, these ETF's will likely take it on the chin if the markets continue to decline, which again remember gives you the chance to buy them even cheaper down the road, but will also likely recover faster and bounce higher than the value ETF's.

At the end of the day, there are two important things to remember. First a down market is not a bad thing. It should actually be seen as good, since it gives us the opportunity to buy at cheaper prices. Secondly, don't let fear and the opinions of others affect or change the way you normally invest. Whether the market is going higher or lower, stick to your investing style, game plan, and investing thesis. Control your emotions during times like this and your brokerage account will repay you in the future.

Happy hunting!

Courtesy of Matt Thalman for INO.com, follow Matt on Twitter @mthalman5513

Disclosure: This contributor held long positions in Apple, Amazon.com, Alphabet, Facebook, Tesla, Microsoft and Netflix at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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