Experts caution against overreaction when faced with large fluctuations in the stock market

TORONTO — When it comes to understanding — and reacting to — the type of steep stock market movements seen in recent days, context is everything.

That’s the key lesson experts say anxious investors should heed in the wake of Monday’s unsettling losses, when the Dow Jones industrial average free-fell to close down nearly 1,200 points, or 4.6 per cent, and downward pressure on global equity markets took Canada’s largest stock index down about 1.7 per cent.

“The media sometimes fan the flames of an episode like this. Yes, this may have been the worst point decline in the history of the Dow, which was down as much at 1,600 points on Monday, but that’s only because it reached an alltime high value this year,” said Jason Heath, a financial planner with Objective Financial Partners in Toronto.

In percentage terms, Monday’s decline doesn’t even make the top 20 worst in history, with the worst “Black Friday” or Oct. 19, 1987 — when the market dropped 22.61 per cent or 508 points.

The markets rebounded Tuesday after a highly volatile day of trading and what happens next is anyone’s guess, so investors should prepare to strap in for a bumpy ride.

“The only thing we know for certain is that stocks will go up or down from here. And over a short period of time, it’s tough for anyone to know what’s going to happen. Over the medium term, stocks will probably be up. And over the long term, they will definitely be up,” said Heath.

Personal finance experts such as Heath say episodes like this reinforce two things: the benefits of diversification and the importance of determining your risk tolerance.

“Diversification helps ensure everything doesn’t move in the same direction at the same time,” Heath said.

And if Monday’s correction of less than five per cent caused you to consider selling stocks, perhaps you should reconsider if you have too much stock exposure in the first place, Heath added.

While many market observers say a correction was expected after a decade-long bull run, the trigger that sparked the sudden downturn is thought to be U.S. figures released Friday that suggested long-anticipated wage growth has started to kick in, resulting in inflation and a greater potential for the U.S. Federal Reserve to raise interest rates.

Personal finance commentator Preet Banerjee

noted investors who sold their stocks after the market declines after the Brexit panic in June 2016 paid a dear price when markets rebounded days later.