A lot of people are worried about the current volatility that’s occurring in stock prices around the world. From my perspective, I feel that the current pullback is actually healthy.
Of course, it hurts to see your equity holdings go down in price, but that’s the business of the stock market. As I mentioned before, the current action in stock prices is taking its lead from Asian stocks. Plus, this is really the first time in a long time that American stock prices have been so influenced by the foreign markets. It’s no doubt a reflection of how powerful the worldview is when it comes to China’s economy.
So, what can you do as an individual investor when the stock market goes through a correction? Well, there isn’t much you can do. You could liquidate your holdings, but if you own good companies for the medium- to long-term, then it wouldn’t make sense to do so. Institutional investors often use corrections to add to their favorite equity positions — they don’t necessarily do a lot of selling.
In a stock market correction, the price action is most often dictated by a lack of buyers in the market, in contrast to a significant amount of selling occurring. Consider your own portfolio, for a moment. If you own a basket of stocks, representing good companies with solid growth prospects, then you aren’t likely to sell them if the broader market corrects. Individual stock prices will still go down, however, not because there’s any major selling happening, but because there isn’t any pronounced buying. Everyone does the same thing — they sit on the sidelines instead of taking action.
If you are a long-time market participant, I think you’ll view the current market action as being healthy. 2006 was a great year for equity speculators. 2007 is going to be more difficult, but know that things often have a habit of working out for the best. The global stock market is trying to develop equilibrium after a major move upward.
Remember that the fundamentals have hardly changed. The only thing that’s happened is that Asian stocks are correcting, since they got ahead of themselves in the recent months. Let’s ride out the current volatility and keep looking for great opportunities.