Actually, some might say that how we view the recent crash is a matter of perspective.
After all, there are many who are rich and doesn’t have a huge stake in the stock market. They can afford to be sanguine in market corrections/crashes. What about the little man on the street?
1. How much at Stake
Person A (Stocks is his lifeline)
Imagine someone who is heavily invested in the stock market, and who is heavily dependent on the price fluctuations or dividend income of his/her stocks. The stock correction or crash will have a more adverse impact on his/her net worth. He/she could be retired and is doing trading for a ‘living’.
Person B (Doesn’t give a hoot about stocks)
Then you compare Person A with someone who is rich or has a well-paying job, or who is financially independent who doesn’t really need to ‘rely’ on the stock market. He has a small percentage of his net worth tied up in stocks or none at all.
He may not even be any of these… just the typical average Joe who doesn’t touch stocks.
- We All Have a Stake in the Stock Market, Right? Guess Again (read here)
Person C (New to investing/trading)
Then there are the newbies who just started out in their investing journey. They could have just gotten their first pay cheque and is eager to start their investing journey with their hard earned money. After all 2017 was a great year. It seems like a good or shall I say easy time to invest. Since almost anything they touch goes up.
They could be in debt (study loan, mortgage, credit cards debts, car loan, etc)…. and this money could also be used to pay off their debt, and take care of their loved ones.
2. The Context
Given that we had a relatively easy 2017.
As stated by the article below:
“But our perceptions are distorted by more than thinking of points rather than percentages. The last 18 months have been one of the least volatile periods for the stock market in modern times. Humans have a bias toward recency, an inclination to let recent experience shape our expectations for the future.
The S.&P. 500 did not decline by more than 2 percent on a single trading day in all of 2017, which helps explain why Friday’s 2.1 percent drop seemed so startling. (The percentage drop on Monday was a much rarer event, one that last occurred in 2011.)
But 2017 was weird. There were five such days in 2016, six in 2015 and four in 2014. In 2011, there were 21 trading days in which the S.&P. fell by more than 2 percent, nearly two per month. A bit of overreaction is as natural as people in normally dry Los Angeles having trouble driving in the rain.
There’s no doubt that the 7.8 percent drop since Jan. 26 is substantial; it represents nearly $2 trillion of paper wealth. But you find some better news underneath that unpleasant fact when you look at what has happened in the bond market while stocks have been falling.”
- Context Matters. The Stock Market Drop Is Less Scary Than It Seems. (read here)
The context has different effects on each individual.
Person X
He/she has been through the Great Financial Crisis, Flash Crash, SARS Scare, Asian Financial Crisis, 9-11, Gulf War, etc….
How does the magnitude of this correction compare to the above-mentioned clashes?
Person Y
He/she has never study the market or the companies behind the stocks. He/she is new to investing… Been ‘used’ to 2017 upward market trend. Never been through a correction or crash. Doesn’t know what he/she is investing in.. just know the price (and the price drop)…
How you think about Stakes and Context Matters
I think how the year 2017 turned out (The Context) and what we have been through do play a part.
How much is at stake… is another story. While reading through the blog posts of many financial bloggers (see my previous post), I find the blogger from Mr. Tako Escapes particularly interesting.
There are many financial bloggers who are already in the Financially Independent stage/retired. Take AK from ASSI, Sam from Financial Samurai and the Couple from Mr. Tako Escapes.
They come from various background. Some are single, some are married with kids. Some are in the high net worth league… some live simply and make do with what they have.
Some depend heavily on their passive income stream while others don’t. Then, there are various ways to get passive income. For example, Sam focus more on rental properties while Mr. Tako and AK focus on stock/REITs dividend income.
Check out who is Mr. Tako. (read here). Mr Tako reached Financial Independence very differently from how Sam from Financial Samurai did it (read here and here). He is also very family orientated.
- He never had a big pay cheque eg. During the bulk of his earning years, he made less than $100,000 a year (pre-tax). He earned it the ‘hard way’, one day at a time, one penny at a time.
- He didn’t work on Wall Street, or make large sums of money from software company stock options.
- He didn’t flip real estate and sell at exactly the right time before the 2008 crash. He was never promoted to an executive level position.
- He didn’t inherit any money.
- He didn’t sell a business for millions.
- In 2015 when he created this page, they (he and his wife) were worth a little over $2 million USD.
- He has two young boys.
Well, considering their net worth – I would say that it is at a comfortable level. Not high net worth.
The fact that he has two young kids and his family is basically living off their dividend income – means his net worth is basically heavily correlated to the stock market. He is also not young (eg. Doesn’t have loads of ‘Human Capital’).
In terms of ‘stake’ —- I would say high. He is Person A in terms of Stakes, and Person X in terms of Context.
However, he is not in the ultra high stake league. These are people who invest/trade using money that is not theirs. Eg. Using margin/leverage or have lots of debt. They invest beyond their means/net worth.
What is particularly interesting about all this is his statement about the recent market sell-off (read here).
“Well, I did NOTHING in January and saw a 10% gain in our portfolio value. The markets were very optimistic and stocks rose accordingly in January. This didn’t make buying new shares easy.
Thankfully, most of these gains disappeared in the single largest one day drop in history of the Dow.
Just like a sale on eggs at the grocery store, I’m going to be on the lookout for good sales on stocks. After all, what true investors want is lower prices, not higher prices.”
Perhaps it is his past experience, and the fact that he knew what he is investing in (knowing very well that dividends will still come, rain or shine). Cheaper prices just mean better dividend income in the future… irregardless of net worth.
When we are young, we have lots of human capital… our pay may be low. But the future is bright. We can afford to wait…
The question is – do we know what we are doing, do we know ourselves well enough (how much pain/losses we can endure) and do we have the patience to wait.
A Pen Quotes 