Posted June 13, 2022
By Zach Scheidt
Fear Is Contagious — Here's What to Do…
Fear is a contagious virus, especially in the financial markets.
A couple of years ago, I might have finished that statement with "especially on Wall Street."
But a big part of today's panic is driven by the plunge in cryptocurrencies — an asset class that’s supposed to be independent of Wall Street.
The problem is that financial markets are linked.
Even if you've never touched a cryptocurrency in your life, fear from that market now affects your investments thanks to the ripple effect spreading through financial markets.
Today, I want to help you avoid catching this virus of fear.
We'll take a look at what’s happening to markets and how you can protect your wealth despite the carnage.
It's All About Perspective
When the stock market opened this morning, the S&P 500 officially entered bear market territory.
Technically a bear market occurs when stocks drop more than 20% from recent highs. But there's nothing magical about a round number like that.
Quite frankly, the market has already been in a bear market, because many of the most popular stocks from the last two years have fallen by much larger amounts.
The only reason the S&P 500 hadn't dropped by 20% yet was that some big blue-chip stocks managed to temporarily hold up the average.
Now that we see bear market headlines show up, I want to remind you that there's nothing special about this round number for the S&P 500.
And investors have already experienced bear market pain this year. So don't let the media's hand waving cause you to panic.
But please do understand that this is a high-risk environment, which requires you to be very intentional about protecting your wealth.
Contagion Between Markets
One of the reasons traditional investments like high-quality stocks are selling off today is the weekend carnage in the crypto market.
Bitcoin, Ethereum and plenty other lower-tier cryptocurrencies had a dramatic selloff over the weekend.
The action was so severe that a couple of exchanges had trouble clearing trades, which caused more panic among investors.
In some cases, leveraged investors (who borrowed from their brokers to buy more crypto) faced margin calls.
A margin call happens when your broker says you must deposit more cash or risk having your position automatically sold.
Margin calls can cause huge ripple effects in the market. Because when investors need to come up with cash, they sell what they can — not necessarily what they should.
That means in many cases, investors will sell their good stocks voluntarily so they're not forced to sell their plummeting crypto positions.
You may think that sounds like a stupid move.
But in a state of panic, investors often do the exact wrong thing and expect the hardest-hit areas to rebound the quickest.
Here's How to Handle a Widespread Fear Event
If you're one of the smart investors who has transitioned to high-quality stocks over the last few months, let me first say congratulations.
It might not feel like it right now — because just about every stock has weakened over the last week or so — but you actually made an excellent decision.
Quality stocks aren’t falling as quickly as the speculative stocks in today's market. They also don't have nearly as much risk.
And these stocks have a much better probability of increasing your wealth once the panic selling is over.
Best of all, if you're invested in companies that pay generous dividends, you'll get cash while you wait. And you can use that cash to buy more shares at even cheaper prices.
As scary as this market feels — and as tempting as it is to sell everything and go to cash — our playbook is still the same.
Buy shares of quality companies that generate reliable profits. If you get a chance to buy them even cheaper, use spare cash to do it.
Use any market rally to sell out of your speculative plays.
And above all, don't allow your emotions to drive your decision making in this market.
Trading from a position of fear will rarely give you positive results. But taking a proactive and professional approach will pay off in the long run.
Here's to living a Rich Retirement,
Editor, Rich Retirement Letter