Could You Handle Losing Half Your Life Savings in a Few Weeks?

Could You Handle Losing Half Your Life Savings in a Few Weeks?

The comments below are an edited and abridged synopsis of an article by Simon Black

By July 2018, just three stocks (Amazon, Netflix and Microsoft) were responsible for 71% of the S&P 500’s returns. Through the third quarter, tech stocks were responsible for 95% of the S&P’s gains. Amazon alone was responsible for about one-third of the index’s move.

Investors were warned about the trouble with investing capital into these popular and often overvalued firms, especially when a number of these companies were burning through cash at unprecedented rates.

Netflix lost $3 billion in cash last year (and added another $4 billion in debt, bringing its total to over $10 billion). The company is currently trading at over 130x earnings.

Tesla was losing over $700 million in cash a quarter (though it recently turned cashflow positive). The company had to lay off 10% of its workforce and cut the price of the Model 3 to attract demand.

The fourth quarter of 2018 saw the market’s growth engine (FAANG) tank, and it wasn’t just the high-flyers like Tesla and Netflix (which fell 24% and 44% from their peaks).

Apple fell nearly 40% from its September highs, and Facebook dropped by 43%. Hundreds of billions of dollars in shareholder value were erased in just a few months.

The prices have recovered slightly from the recent lows. But these falls can happen faster and be more severe than anyone expects.

Some of the most popular and largest stocks in the world were nearly cut in half because the Federal Reserve raised interest rates by a few basis points. What happens when we have a real reason to be worried?

In 2008, millions of people lost their retirement savings in a matter of months. The market could easily fall by 50% or more again. Investors need to ask what they will do in such a scenario.

The key is to think about it now, before the crash. Because in the heat of the moment, you’ll be panicked and emotional.