Thousand Stocks Underperforming Episode 81

Bloomberg ran an article this week that stated, “One of the interesting aspects of the brief selloff in stocks in late November was that breadth deteriorated markedly. The broad indexes were only down a few percentage points, but there were more than a thousand stocks making 52-week lows on a daily basis.” 

So, large indexes were only down a little, but over thousand stocks were the lowest they’ve been in a year. Big companies like Apple and Facebook and Microsoft help lessen the impact of the smaller companies losing.

The article continues to explain that nearly every investor owns those large companies, because they are used as hedge. As the market decreases, they tend to rise. In the early 2000s, the hedge stock was Cisco Systems, but when the volume of trading continually declined, it was the start of the Dot-com bubble.

But many people are unwilling to get out of the big stocks because their cost basis is so low. “Psychology dictates that people don’t experience as much pain with the loss of big unrealized gains as they do with outright losses, and are willing to withstand corrections of some magnitude. If you have a 500% gain on a stock instead of a 1,000% gain, it’s still a 500% gain." 

The author also explained that another advantage for the market has been people’s willingness to continue holding because it seemingly only goes up. The author concluded by saying, “I have also come across more and more investors who characterize themselves as optimists. Sure, optimism works most of the time. But there are long stretches when it doesn’t. Most people forget how painful the dot-com bust was at the time. It was a full three years before stocks finally returned higher. And don’t forget the sad period of 1929-1945. If the time you have to wait for new highs isn't for years or decades, it’s not easy to be an optimist. Remember, as recently as 13 years ago, pessimism worked as a strategy. They made a movie about it, if you recall: The Big Short.”

What To Look Out For

If you’re within ten years of retirement, what the market is doing is important to consider. How you’re allocated matters more as you get closer to using your investments for income. Consider whether what you’re doing is appropriate for your situation and verify whether it is with a trusted advisor. 

David can be reached at 864.641.7955 or by emailing [email protected]

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