If you needed any more reason to take immediate steps to safeguard your savings, the recent earnings report season has provided it.
Looking beyond the recent rise in the general equity markets, we turn our attention to corporate earnings. At first glance, it looks positive. Several companies have reported profits. But you have to look a little deeper.
The majority of these profits are not the result of increased sales but cost cutting. Cutting costs is a good sign that a company “gets it”. However, long-term (sustainable) investment returns don’t come from cost cutting; they come from business growth, increased sales, which are a result of an increased demand for a company’s products and services. Look around you. Are stores opening, businesses expanding, jobs increasing?
Given the strong bounce in the stock market over the last several weeks, it may take a while for the next correction to arrive, but it will arrive and sooner than expected. This should provide you with a brief window to prepare for what is most likely coming. I wouldn’t say it is imminent because markets can remain rational for longer than people have patience.
It’s only important that you understand the risks associated with throwing your hat off and diving back in with the expectations that everything is back to normal (status quo of 15-20% annualized returns)
Key Point: Many investors tend to invest on emotion and react, buying in at cyclical tops and selling at bottoms. It’s important that you gain control of your emotions by not reacting to the gyrations. This comes from a well defined plan. This is not taught or encouraged on Wall Street. Buying and Holding (hoping) is not the panacea it was once thought to be. You have to take the necessary steps to control risk and truly understand where you capital is invested.
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