If you’ve kept up with news headlines recently, you’ve probably read that panic has hit wall street, or at least that’s what the headlines will make you believe!1 Equity market volatility has been particularly dramatic this week, but I’m here to tell you, it probably seems more dramatic given the less than dramatic past 2 years in the stock market.
This bout of volatility since the end of January is actually much more normal than the past 2 years of a “boring” up trend in the market that many have been lulled to sleep by. Most market pundits are referring to recent market action as a “correction,” which is defined as a drop of at least 10% or more for an index or stock from its recent high. So, let’s take this time to talk a bit more about market fluctuations and what you should keep in mind.
Volatility and corrections happen! Historically, they happen quite frequently. While it isn’t necessarily fun, this is part of investing. Prices fluctuate, sometimes quite dramatically. This is something that an investor must realize and think about as a trade-off for the amazing growth that can reward disciplined investors over time. Looking back at history, corrections tend to occur nearly every year, however, we haven’t experienced even a 5% drop over the past year. Additionally, according to Schaeffers Research, there were only 8 days in 2017 where the S&P 500 was up or down more than 1%. Going all the way back to 1928, only two years had fewer 1% days. That goes to show you how unusual the past 1-2 years has been!
Don’t think you can predict when the next one will happen! People often ask me, when are we going to see the next market pullback? My answer is always the same. I don’t know! Nobody can accurately predict when a correction or any market downturn can occur, or even how long it might last. Anyone that says they can is either lucky or a liar! What I can tell you is people that do get uneasy likely need to rethink their investment strategy and be careful of letting their emotions drive them to make poor decisions. Remember, buying high and selling low doesn’t work! This is why its so critical to have an investment approach and financial plan you can stick to through certain and uncertain times.
What does volatility mean for you?
Volatility can mean opportunity! I love to buy things when they’re on sale! who doesn’t? Volatility often means a great time to buy equities when prices are down. If you have idle cash to invest, or are actively making contributions to your retirement plans, this suddenly is a time to buy equities “on sale!” Economic and corporate fundamentals remain strong, and that didn’t just suddenly change on January 29th. Think of volatility as an opportunity to put new money to work, and at lower prices. Additionally, this can also represent a good time to consider rebalancing your portfolio and look to buy back into equities if your portfolio has fallen out of your target allocation. This is something most people overlook, and has the potential to drive greater returns over time - Don't underestimate the power of rebalancing!!
Remember your time horizons and goals. If you’re still actively saving and investing for retirement that is still many years out, you must remember that market corrections can happen, but over the long term, can represent wonderful buying opportunities. Based on research conducted on the Dow between 1945 and 2013, John Prestbo at MarketWatch determined that the average correction (which worked out to 13.3%) lasted a mere 71.6 trading days, or about 14 calendar weeks. For someone that is years away from retirement, a correction shouldn’t be cause for alarm. Corrections also provide a chance to see how truly comfortable an investor is with market risk, and determine if changes are warranted.
These are just a few things to keep in mind during any bout of market volatility. Sell offs happen in the stock market, as any seasoned investor knows, you just can’t let your emotions drive your investing decisions as trying to time the market is a fool’s errand. It happens far too often with people, and results in lost returns over time. As I said before, this is why its critical to have an investment approach and financial plan you can stick to through certain and uncertain times.
Lastly, don’t fall for the media’s scare tactics. What we’re experiencing in the market is normal, don’t let them lead you to believe otherwise.
Are this week’s market gyrations making you wonder about your own investment strategy? Are you questioning your current approach? Does any of this bring up any additional questions? Things you hadn’t considered? Consider it an opportunity to reach out as I’m here to help!
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation.