Labor Day is one of those occasions when retailers can’t seem to fire off enough coupons or announce enough sales.
This time of year can be a great time to shop for end-of-summer bargains and back to school/work discounts. So perhaps its also a perfect time for stocks to be find their way into the clearance rack: All stocks 20% off!
Stocks aren’t hugely discounted, but they are selling at less than the average price-to-earnings ratio. And that bargain hunting is at the heart of dollar-cost averaging.
We all know that the best time to sell is when everyone else is buying because you’ll command the highest prices — and to buy when everyone else is selling, or in the case of today’s market, afraid to buy because you’ll get the best deals.
We are social creatures however. We love to travel in packs. We feel more secure buying stocks when everyone else is. It’s lonely to step out into today’s market and, with a very slowly recovering market, it can be scary.
But this is emotional, rather than rational, investing. It’s what makes your clients run from bargains in the stock market when they should be shopping.
Of course, investors are terrified. They’ve been through hell and they don’t want to go back there. But that is exactly when they probably should be investing. As an advisor, you have a simple tool to help them handle such uncertainty: You can educate your clients about dollar-cost-averaging. It is the simplest way to ensure that they proceed in a rational, rather than an emotional, manner.
By investing a fixed amount of cash into the market on a regular basis, clients are assured of buying more stock when it’s cheap and less when it’s expensive. By investing in this manner, they won’t be throwing their entire cash stash into the market but dribbling it in so risk is significantly reduced.
Explaining this to clients should help you calm their fears about venturing back into the market. It will make you look smart and make them feel more secure about investing. After all, everyone loves a bargain.
A Closer Look at the Flash Crash (Aug. 27)
The recent news lowering the rate of economic growth for 2010 reminds me of the day it all turned around.
The market had been rallying for over a year when suddenly that all seemed to stop when the Dow Jones Industrial Average dropped 10% in about 15 minutes in the flash crash of May 6.
Some stocks such as Accenture and Proctor & Gamble fell over 30%. Accenture was trading at one cent. Since then we’ve had nothing but volatility within a trading range. Investors frightened by the 2008 financial crisis were just started to regain some faith in the markets when the flash crash drove them back to the sidelines.
What caused the flash crash?
Despite Congressional and SEC investigations into the matter, no one still knows. Circuit breakers put in place are designed to help prevent another one but since no one knows what caused the problem in the first place, no one knows if they will actually work. Traders primarily attribute the crash to a “fat finger” or human error, someone typing in billions instead of millions, others point to unrest in Greece setting off a wave of selling, still others blame it on the myriad of high-frequency traders working on high-speed computers, while still others think the problem lies with a myriad of electronic trading systems, that speed up the pace of market activity and lack the New York Stock Exchange’s ability to slow trading.
We should know more about what caused the pivotal plunge when the SEC and the Commodity Futures Trading Commission issue a final report on their findings in September.
Of course, the markets have gotten more complex and with increasingly high-speed technology everything seems to get more complex. But, before you get lost in the thicket of all this, there are simple realities out there that don’t necessarily change with the markets. One is that you could help protect clients against selling a stock like Accenture at one cent by placing a limit order.
Limit orders allow you to limit the price at which a stock gets sold so that you can protect clients from losing out in a flash crash. Making this a routine practice seems to make good sense. Even if the markets are so complicated, the so-called experts can’t figure out what caused the flash crash, you have a simple tool with which to protect your clients from its future occurrence. Even if the SEC or Congress figures out what happened or how to prevent it from happening again, you can rest assured that the markets will remain volatile. Placing limit orders will probably continue to be a good, low-tech solution.