When the stock market starts to swing up and down by triple digits each day, even the brave can get fearful.
But you never want to make investment decisions based on emotions.
And let’s not forget that what we are seeing now is something we’ve been forecasting for over two years.
A pullback is overdue
We are, indeed, way overdue for a market pullback.
It has been three years since a correction, defined as a decline of at least 10%. (And do the math – a moderate drop of only 10% on the Dow means a not so moderate 1,600 point decline!).
The historical average is one correction every 12 months, so we’ve got no reason to complain.
Bull markets don’t run in straight lines
If you’ve ever seen charts of the stock market, you’ll know that it rarely moves in a straight line. Even though the market has climbed stupendously upward over the decades, its path has been ragged, with dramatic peaks and even more stunning declines.
To tame those peaks and valleys, we diversify your portfolio and include less volatile investments like bonds and other alternatives. We make sure to have a good supply of income-producing investments on hand to help meet your retirement income needs.
And we remind clients that stocks are long-term investments designed to attain your long-term growth goals. Investing is a marathon, not a sprint.
Some tips to keep your cool
Dollar-cost averaging, or investing a little bit at a time, helps reduce your risk. When stocks decline, and you keep buying, you profit from lower prices by buying more shares at lower prices. Just think of it as shopping when everything is on sale.
Liz Ann Sonders, Chief Investment Strategist at Charles Schwab & Co., anticipates that, despite the current geopolitical woes, markets will rebound, saying “we don’t see anything that indicates a more sustained downturn is in store.”
Look for less fully-valued assets and markets. One of the best ways to make money is to buy when prices are lower, then hold on until prices recover.
One of the reasons given for these rocky markets is slowing overseas growth. That may be true, but the U.S. economy continues to strengthen, and low interest rates will provide additional stimulus. Forget what you read about interest rates climbing higher. Based on the current outlook, that time is still a long way off.
“One key to keeping a cool head during market drops is realizing how common they are,” writes Morgan Housel in the Wall Street Journal. “If you don’t understand how normal big market moves really are, you are more likely to think a pullback is something unusual that requires attention and action. It often doesn’t.”
There is often no good explanation for the pullbacks. “The honest answer (is) that this is just what stocks do sometimes,” says Housel, adding that “successful investing is mostly a battle with your own brain.”