When you break down the performance of the stock markets over a very short period of time, you can conclude that the markets are very volatile. The markets can go up and down depending on the daily news. Just for fun, let’s look at some possible news headlines you may come across.
Headlines that almost always cause a drop in the stock markets
“Job number was worst last month than the previous month”
“Consumer spending was down 5% last month”
“Housing sale dropped by 10% month to month”
“North Korea to start missile exercises in Pacific Ocean”
"Greece faces yet another potential bankruptcy"
Headlines that almost always cause a jump in the stock market
“Consumer spending increased by 10% last month”
“Feds to continue stimulating the economy by buying $1 billion dollar worth of bond each month”
"Underemployment rate decreased by 5% month over month"
“Just Bieber to give up on singing career to become a Catholic priest” -> Please let this come true haha!
Most of these headlines, if not all, should be considered as noise. For a long term investor, we should ignore these noise and continue with our investment strategies. For me, when the stock markets drop I’m looking for opportunities to increase our dividend portfolio. Big name, well run, profitable international companies like Coca Cola (KO), Johnson & Johnson (JNJ), Protector & Gamble (PG), and McDonald’s (MCD) do not all of a sudden become worthless junks just because poor job number results or poor housing sale numbers. The stock price may get dragged down by the overall market but if the companies are still profitable and well-run, this will be a little blip on the stock chart in the long run.
Here's a great tip for long term investors - buying stocks on pullbacks. When the stock price drops over a short period of time, we refer to this as a stock pullback. When a profitable and well-run company’s stock price all of a sudden pulls back by 5%, 10% or more, this can be a very good opportunity to become part owner of the company. Just because others are fearful and selling the stock, it doesn't mean you need to follow the masses. Look at the big picture, is this company still profitable? Can the company increase its earning per share (EPS) over the next 5 years? What is the company's future growth potentials? Did the recent earnings meet the expectation? If not, what caused the lower than expected results? Is it because the overall market or economy? Or is the company becoming less efficient at making money for its investors? We must evaluate all these factors to determine if the company can continue delivering profits in the future and whether we can invest in this particular company.
Typically these potential “great” stocks are on your watch list already, so you’re just monitoring for a good entry point. A 10% stock pullback may be an excellent way to enter and buy some stocks on sale.
Having said all that, buying stocks on a pullback doesn't always guarantee good returns. You need to do your homework in evaluating stocks on your watch list. If you fail to do your homework, you’ll end up with something that may continue to drop in price. This certainly isn't a great investment strategy.
Do your homework, monitor stocks of great-run companies, then consider buying them during stock pullback. This is a simple concept but not easy to execute.