Will the stock market crash?
YOUR INVESTMENTS
Like the headline? Well, along with increased market volatility comes phone calls from jittery investors nervous about the drop in financial markets. Their knee-jerk reaction is always to “do something ” – as if by “doing something” the drop will go away.
The first thing investors need to realize is something I have mentioned numerous times. Markets are volatile. Period. Correct, we were in a statistically abnormal time frame of low volatility, but that ended with a bang. Markets, on average at least once a year, drop by 10%. The second point I make is that investors shouldn’t get nervous over the big number drops. Remember that a 200-point drop on the Dow Jones Industrial Average is now less that 1%. In the past that may have been a 2%-4% fall, but no longer.
Investors became complacent over the last few years of market gains, and what this roller-coaster ride really ends up accomplishing is create a dose of reality – a true wake-up call. Intellectually, investors understand that if they are investing for the long term, there are bound to be market drops. But emotionally, no one likes losing money, and a certain sense of panic takes over.
When clients call to say they want to “do something,” here are a few things I tell them to do to help navigate these current stormy markets. Keep in mind that I have written about these tips before. It’s just as is written in the introduction to the book Mesilat Yesharim: “I have composed this work not to teach people what they do not know but to remind them of what they already know and which is very familiar to them. For you will find in most of my words only things which most people already know and do not have any doubt about.”
Baskets for eggs
We know the concept of not putting all our eggs in one basket. In financial parlance that means to diversify your investments. Diversification is an investment technique that uses many varied investments within a single portfolio. The idea behind it is that a portfolio of different kinds of investments may, on average, yield higher returns and pose a lower risk than a single investment. Diversification tries to smooth out volatility in a portfolio caused by market, interest-rate, currency and geopolitical risks. It’s important to remember that diversification does not assure against a loss.
What often may happen is that after a multiyear market runup, investors may be sitting on a portfolio that is much more aggressive that they planned to have. Use this time to hit the reset button, and get your portfolio back to what you had envisioned to start with.
Chill out
An important lesson in investing is that if you can’t afford to lose money, don’t invest in growth investments. I know it’s not easy, but you need to relax and stay focused on your long-term goals. It’s important to remember that markets go up and down, and if you made a financial plan, it would have taken this type of market volatility into account.
As I have written here many times, the worst thing you can do as an investor is to panic and sell everything and then wait for the market to recover. The market tends to recover very quickly. Large market gains often come about in quick and unpredictable spurts, and missing just a few days of strong market returns can substantially erode long-term performance. Remember the famous investing principle of buying low and selling high. Investors who panic, often end up selling low.
Take a deep breath and hold tight. Maybe the best advice is just not to look. Don’t hit refresh on your computer. The drops will pass sooner or later.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.