Nagle's Notes 11/1/24

By Peter Nagle

​Things are going great in the stock market, and that’s wonderful. If you’re invested, enjoy it. The thing is, markets don’t go up in a straight line. They never have anyway. There are these events called “corrections” that occur regularly. A nice word for “your account is going down in value - rapidly”. 
 
Yes corrections today, few and far between as they’ve been - which is very unusual - happen very quickly. You can be down 10 or 20% in a week. It’s shocking when that happens. Very shocking.
 
In my own view, I see a significant correction coming in the next 6 months or so. By “significant” I mean somewhere between 15 and 30%. The faster and farther it goes up….
 
The question is not when will it happen and how bad will it be. It will, in my view, and it will be. The question is how will you react? Will you sell in a knee jerk reaction? Will you put blinders on and cover your ears so to speak and try to ignore it? Will you just hold on for dear life? 
 
These are common reactions, we’re only human after all. I’ve been in this business for over 40 years and one thing I do know is that our emotions and our money do not mix well at all. As hard as it can be, we need to make emotionless decisions when it comes to money. We have to be a bit hard and cold about the way we think about our money. 
 
If you’re in it for the long haul then you have to have a plan on how to take advantage of the up years, and how to survive the down periods. Remember: corrections now tend to be short and severe, while rallies tend to be long and drawn out. Actually I think we can be kind of thankful for that!
 
The thing is, not to “react”. It’s better to anticipate than react and put a plan in place to ride out the storm, whenever it may come. What do I mean by that? Put your portfolio now in a position to ride through the inevitable downturn well. So how can I do this? 
 
Increase cash. That’s the first step. I see money managers selling stocks and increasing cash positions right now. I see Warren Buffett doing the same thing. These people are smart, and they are in the market all the time. And they’re emotionless about their money. That’s how we must be. And if they’re reducing exposure to stocks, shouldn’t we?
 
If you decide to do that, look at your portfolio and determine how much you want to raise the cash level to. Increasing to 25-50% would not be unusual. Yeah, it’s painful to sell some of the winners and take gains (taxable if you’re in a taxable account). There’s a bit of pain involved is doing this. You can’t avoid the emotion of “will I regret this?” But you either have to do it or not. And not is fine IF you won’t “react” in a correction and sell then. That is almost always a mistake. Make your decision and live with it, that’s what you need to do.
 
The benefit of this strategy is that, when the correction does happen, you’ll feel like you’ve already taken action to survive, maybe even thrive, and on top of that you’ll have lots of cash to buy when things get cheaper. 
 
It’s nice to get something at a discount, right? This is how stocks go on sale - at a time when your emotions scream “Don’t buy, it’s gone down a lot, and it’s never going to stop!” - is precisely when you need to get past that emotion and act. Buy good stocks whenever they go on sale. That’s the key. That’s what Warren Buffett does. Then you’ll actually be taking advantage of a correction, instead of falling prey to the emotions it causes. 
 
Peter J Nagle
Guaranteed Income Specialist
Thoughtful Income Advisory
Abiquiu, NM 87510
505-423-5378
[email protected]