The Dow Jones Industrial Average (DJIA), or simply the “Dow,” has fallen by 1,000 points or more twice in one week. Twice this week, the major averages have fallen ~4% or more in a single day. And as of yesterday, it's officially a correction. Even as I write this letter, the Dow has started its day in the positive by 200+ points signaling just another roller-coaster day on Wall Street.
Now, when analysts say that the Dow went up or down for this or that reason, they're often just guessing. What specifically moves something as complex as the stock market is in some ways unknowable. The only thing we do know as a certainty is that stocks are volatile and can change in price extremely rapidly. Consider this… while the Dow has declined dramatically over the past week, do you remember where it was one year ago? On February 10 one year ago, the DJIA closed at 20,204 – nearly 4,000 points lower than its current position.
You may be wondering how this volatility could affect you. Should you sell? Buy? Worry? Wait? The best advice we can give at this time is don’t panic. Hasty, speculative decisions aren’t advisable in any market. While we’re not able to predict the future, we offer the following points for you to consider:
This is expected
We anticipate volatility; it’s a normal and healthy part of market cycles. The chart below shows the frequency of similar events.
Your portfolio may not be down as much as the market
While the Dow may be down 10% percent or more, your accounts are not invested in the index and if diversified, have probably declined less than the market. The two indexes that dominate the media, the Dow and the S&P 500, represent only large publicly owned companies – a limited group of the investment world. Your diversification in bonds, domestic small, medium, and large-company stocks, foreign stock and other types of investments strive to smooth out risk in a portfolio so the positive performance of some investments neutralizes the negative performance of others.
Now may not be the time to sell
No one can consistently predict the right time to get in or out of the market. Even if you get out early in a decline, you’d still have to guess when to get back into the market and there's a high probability you'll guess wrong. For most people, the real money will be made not out of buying and selling but of owning and holding a diversified portfolio of securities through the market cycles. History has shown that timing the market is not the recipe for growth. Instead, it is the time you spend in the market.
It's not a loss until you sell
It’s normal to feel uncomfortable when the market is down, especially if you’re in retirement or approaching it. However, each time in history that the market has gone down, it has come back up again. Average downturns of 10% are likely to return to normal within about 115 days, based on historical data. And while your investments may experience a decline in value, you only “lose” money when you actually sell or liquidate your investment holding. The markets are capable of amazing rebounds, and amazing gains; your investments can increase in value as quickly as they decrease.
Stay focused on the long-term
Your financial plan and investment strategy should be built for the long-term, with short-term volatility in mind. While a correction can be upsetting, there’s no reason to deviate from your long-term financial plan. After all, more often than not, it tends to be the long-term investor who experiences the greatest investment success in the long run. And while the wild roller-coaster ride of the current environment may be difficult to stomach, this, too, shall pass.
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