No need to overreact to US sell-off

ALTHOUGH the drop in US equities of around 4 per cent on Monday was more like a market tremor than a crash, is this a time to be fearful?

A savvy investor is never fearful. But if you are fearful of market falls, it simply means you lack the required knowledge and need to do something about it.

It’s easier to point the finger at US President Donald Trump or to find reasons to justify your fear as to why the market has fallen, including uncertainty around the US FED’s decision to hike rates in 2018. What’s important to know? Firstly, markets never crash at the top, as the heaviest selling and biggest falls typically occur close to market bottoms.

More importantly, markets unfold in three ways — uptrends, downtrends or sideways trends. When a market accelerates away from its major trend, which occurred in the US over the past year as it rose to all-time highs, history demonstrates it will eventually pull back to the trend. AFTER the sell-off on the US market on Monday, commentators predicted what would occur on the Australian market — and got it wrong.

The Dow Jones fell 6.26 per cent and recovered slightly to close 4.6 per cent down on Monday.

The sell-off saw the All Ordinaries Index trade back down just below the 6000 point mark, which I previously mentioned was likely to provide support. What has occurred demonstrates how markets can overreact.