Last week was an awful trading week on Wall Street, with the S&P 500 posting its worst year-opening week in history by losing 6%. Global stock markets lost $2.3 trillion, alarming investors who worry about the market forecast for the remainder of 2016. Baby Boomers especially are nervous about the large fluctuations and the impact on their retirement accounts.
The market downturns were a result of a number of factors including:
- Large losses in the Chinese stock market
- Low oil prices
- The recent interest rate increase
However, at times like these, it’s important to put current conditions into perspective. This is not the first time the market has taken a tumble and it won’t be the last. Over the past 60 years, there have been 15 occasions where the stock market has declined by 20% or more. These bear markets have lasted an average of 10 months and brought stock market values down an average of 29% (Source: Wall Street Journal). While last week was difficult, unfortunately, we anticipate more volatility in the weeks and months ahead.
While easier said than done, successful long-term investors know that it’s important to stay calm during a market correction. Market volatility has increased in recent years and the media can often make it seem like each episode is worse than the one before. In reality, volatility does not hurt investors, but selling when the market is down will lock in losses.
At our firm, we understand that you are likely concerned with the recent downturn. However, we encourage you to keep in mind that while the stock market may be down significantly, your portfolio is made up of both stocks, bonds, and other assets that are designed to work together to decrease overall volatility. It’s important to consider your specific portfolio, investment horizon, and circumstances when reflecting on economic events. As we experience market fluctuations, here are four essential actions to take.
1. Seek the Counsel of Your Advisor
Whether you’re new to investing or an experienced investor, it’s helpful to consult with an objective third-party. Human nature causes us all to act out of emotion when our accounts go down. As an independent firm, we put your best interests first. We seek to serve as a support system for our clients, helping them make informed financial decisions that aren’t driven solely by emotion.
If you are uncertain about the markets or wonder if you should make a move, please call us first. Together, we can discuss what is appropriate in terms of your immediate needs and long-term objectives. Sometimes, simply speaking with your advisor may help you feel more confident with your strategy and less concerned with the day-to-day market activity.
2. Don’t Let Emotions Control Your Decisions
When the markets take a dive, many investors immediately panic. Our first instinct may be to sell, as we fear prices will continue to plummet. The opposite response is to take advantage of the low prices and buy quickly. As Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.”
However, both impulses can lead to mistakes. It’s important to make sure the decisions you are making aren’t emotional reactions. Steve Schaefer from Forbes warns, “reeling markets offer buying opportunities, but snapping up shares just because they are beaten-down is no different than selling things just because they went up.” It’s important to both buy and sell objectively and make investment decisions with professional guidance.
3. Take (Sensible) Action
While you don’t want to react emotionally, investors should not completely ignore the markets either. If you have friends or family members concerned about their accounts, invite them to call us to discuss appropriate steps to take. We are never too busy to help someone you care about.
While a stock market correction can be upsetting, remember that it also provides an opportunity to re-evaluate holdings and risk tolerance. Investors may determine that a stock that looked attractive months or years ago is no longer the best investment option. During your portfolio review, we can work together to determine if there are any adjustments to make.
4. Don’t Try to Predict the Market’s Direction
The only thing we know for certain about the markets is that there will continue to be ups and downs. The recent stock market drop wasn’t a crash; it was a correction. These corrections can occur within any timeframe and can be caused by a number of different factors. Predicting what will cause the next correction and when it will happen isn’t possible. Rather than predict what will happen next, it’s more important to determine how you can position yourself to weather corrections of small and large magnitude.
January’s correction wasn’t the first, and it won’t be the last. In fact, Deutsche Bank’s research shows that the stock market, on average, has a correction every 357 days. Market corrections are an inevitable part of owning stocks. While we don’t know for certain when the next correction will occur, you can prepare yourself and may feel more confident in your plan by speaking with our team. If you have questions about the recent events or your portfolio, give me a call to discuss. I look forward to hearing from you.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing involves risk including loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.