The stock markets are a mess this year. The S&P 500 is down 4.07% this year. The Nasdaq is down 7.95% and in correction territory. The Dow is down 1.56%. And the Russell 2000 is down 7.69%.
My group texts — normally reserved for sports discussions — are blowing up with investment-related questions and commentary. Among the common questions:
- “What’s going on?”
- “Should I buy the dip?”
- “Where should I move my money to?”
Let’s take these questions one at a time.
What’s Going On?
The better question is what isn’t going on?
- Inflation? ✅
- Supply chain issues? ✅
- Chip shortages? ✅
- Interest rates going up? ✅ (coming in March)
- Economic growth slowing down? ✅
- Ongoing COVID-19 concerns? ✅
- Tension between Russia and Ukraine? ✅
More importantly, all of the stimulus that governments have been pumping into the system is beginning to dry up. That stimulus has helped keep economies afloat — and markets soaring. Companies now have to show they can survive without those tailwinds. Many can’t. And even more will struggle to repay debt as interest rates go up.
Investors have plenty of reasons to be jittery. And the markets are reflecting that.
Should I Buy the Dip?
I’m generally a fan of buying the dip. It can be an opportunity to buy stock in a premium company at a decent discount. But whether you buy the dip really depends on your investing time frame (and personal financial situation).
If you’re a long-term buy-and-hold investor, then adding positions now makes sense. You’re betting that over the course of several years, your investment in top-notch companies will be rewarded. And historically, that’s a good bet.
But if you plan on cashing out of your position in less than two years, caution is warranted. We’re in the midst of the longest stock market upswing the U.S. has ever seen. This leg up, which began in 2009, has been so incredible that the pandemic lows (which technically ended the bull run) proved to be nothing but a minor speed bump. The markets regained what they lost in a matter of months and have continued to surge higher.
Stocks can’t continue to go up forever. And with interest rates likely going up, inflation reducing spending power, growth slowing down and a fragile supply chain that can break at any minute, it feels like we’re on the verge of a major correction.
But timing the market is a fool’s errand. The correction could happen next month. It could happen six months from now. It could happen two years from now. Or it might rewrite economics as we know it and never happen. We just don’t know.
That’s why it’s important to know your investment time frame. The longer your time frame, the less risk you take on — and the more aggressive you can be.
Where Should I Move My Money To?
With the equity markets in turmoil, many investors are looking for a safe haven. Crypto isn’t an option for escaping volatility. Investing in bonds is almost like burning money — their already meager returns can’t keep up with inflation. Gold hasn’t been much better in recent months. It’s up 2.59% over the last six months and just 0.11% over the last 12 months.
But there’s one asset that isn’t affected by problems in the broader market — and can easily generate more substantial returns than bonds, gold or even real estate. That’s startups.
Startup investments are fundamentally illiquid. That means you can’t (for the most part) buy and sell shares on an open market. As a result, the values of startups don’t go up or down based on how the market is doing. In fact, if you invest in an early stage startup, you typically have to wait at least five years — usually seven to 10 years — before you see a return on your investment.
This helps insulate investors from economic turmoil. Founders are disrupting markets and building for the future. It takes years for them to go public or get acquired (which is when startup investors can sell their shares and make their money). And by that time, today’s market woes will be forgotten.
And with more than $620 billion invested in startups globally, there’s plenty of money in the private markets to sustain companies as they grow.
The best part of startup investing is that it’s the ultimate buy low, sell high strategy. Invest in startups when they’re million-dollar companies. Sell when they’re worth hundreds of millions or even $1 billion. Make 10x, 20x, 30x or even 100x your investment.
There’s plenty of risk. Most startups fail. That’s why investors need to build a portfolio of 25 to 30 startups. The big winners will more than make up for the losers. And they’ll likely make more money than most stock investments. So if you’re looking to diversify out of the stock market, consider startups. It could be one of the best decisions you’ll ever make.