Stock drops feel scary, but are necessary
Q & A WITH KENDALL W. KING
Q: What is causing stocks to go down?
A: Economically, little has changed from only a month ago, prior to stocks going down sharply. When stocks move like we’ve seen in the past few weeks, it is typically because the market is anticipating economic or political changes in the future. Also, keep in mind that U.S. stocks have more than quadrupled since 2009, measured by the S&P 500, so it’s to be expected that stocks will retreat periodically before they go higher. Ten to 20 percent stock declines happen almost every year, so the current downturn is nothing out of the ordinary according to historical standards.
Q: When will stocks go back up? A: No one knows for certain which way stocks will head next, but history tells us that stocks tend to bounce back after sharp downturns like those we witnessed recently. Returns on stock investments do not always appear in a given day or week, but the longer investors remain invested, the more likely they are to capture the future returns. Investors can take comfort in knowing that even during dramatic days like those in October, when stocks dropped sharply, the market is still functioning properly. Fortunately, investors can expect a positive return in the future if they are willing to stay invested in stocks long enough.
Q: With the extreme market volatility, should investors make any changes to their portfolios?
A: It’s important to understand that pullbacks are a healthy and necessary part of investing in stocks. Although the drops may feel scary, they are necessary to earn the higher investment returns that stocks have provided over other available options such as cash and bonds. Those who are holding portfolios that are suitable for their goals, needs and risk tolerance should not make any reactionary changes. The one thing investors should consider right now is rebalancing their portfolios, which involves selling some of the positions that have done well recently and buying more of the positions that have not performed well lately.
Q: What can investors do to get through the market volatility?
A: The most important thing investors can do is to hold a broadly diversified portfolio, balanced between different types of asset classes. Broad diversification will provide two primary investor benefits. First, it will reduce the effects of short-term market fluctuations as compared to a concentrated portfolio. Second, a diversified portfolio ensures the capture of all the market returns in contrast to a portfolio holding just one part of the capital markets. Another important concept is to take a disciplined approach with investing and avoid making decisions based on emotions. This is often easier with the help of a trusted financial adviser, who can assist with controlling harmful behaviors. Lastly, as an investor, you should focus on the areas that are within your control. You can’t control the economy, election results or future market returns, but you can control investment costs, how much tax is paid and how much risk you are willing to take on. Choosing to focus on things you can control instead of the daily stock fluctuations will give you peace of mind as you navigate the ups and downs of the ever-changing stock market.