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The One Thing to Remember About Extreme Volatility

March 26, 2018

Volatility has been severe.

After watching the Dow Jones Industrials explode from 24,809 to a high of 26,616 in January, the bottom started to fall out on February 2, when the Dow fell 665 points. The Dow plunged 1,175 points on February 5 and 1,032 points on February 8.  On March 1, the Dow dropped another 420 points.  Then, on March 19, the Dow fell an additional 400 points, wiping out nearly all of the gains picked up for 2018 in January.

Unfortunately, the chaos continued, as the Dow sank another 1,124 points in two days last week, as trade war fears with China rattled markets. On Thursday, March 22, the Dow plummeted 724 points. On Friday, March 23, the Dow sank another 400 points.

"A global trade war, whether it's real or perceived, is what's weighing on the market," said Ian Winer, head of equities at Wedbush Securities, as quoted by CNN. "There's this huge uncertainty now. If China decides to get tough on agriculture or anything else, that will really spook people."

All shortly after President Donald Trump announced tariffs on about $50 billion worth of Chinese imports. Of course, China wasted no time with threats to retaliate with Beijing warning that it would “take all necessary measures to defend to resolutely defend.”

Such chaos between the two warring nations is a big deal because both are major economies. China is a major buyer of U.S. crops, especially soybeans. And the U.S. is a major buyer of Chinese goods. Any slowdown in either economy could put a damper on what has been a bright economic outlook.

Granted, computerized trading made matters worse, as stop losses were hit, too.  However, as we also noted last week, markets are resilient.

Even in times of excessive chaos, there is opportunity. As even Warren Buffett will tell you, "Be fearful when others are greedy and greedy when others are fearful."

Unfortunately, many investors are too fearful to think like that.

They fail to see the forest for the trees, sell stocks, and miss recovery rallies that often follow. Unfortunately, that too is a painful lesson in market resiliency. After falling 1,124 points, the Dow rallied 400 points higher on Monday morning, as trade war fears began to cool.

In short, don't allow yourself to get caught up in excessive fear.

Instead, wait for the fear to dissipate.

Better yet, once the fear has died off, look for the opportunities in the rubble

In fact, a correction of this size typically creates an opportunity for smart investors to pick up quality stocks at lower prices.

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