A lot of investors are still smarting from the awful bear market in 2008–2009. The media quickly pointed out that last Thursday was the biggest one-day drop since the Dow Jones Industrial Average lost 680 points in December 2008. That sell-off was blamed on the financial crisis. This one is being attributed to Europe and concerns over their sovereign debt situation or our weak economy – take your pick.
Fearing a repeat of the 2008–2009 bear market, some investors see this as the time to cut and run before things get worse. But is selling after the market drops the right thing to do? No one knows what is going to happen to the market (although there is never any shortage of opinions). The stock market is now down more than 10% from its peak this year. That means we are officially in a stock market correction. Stock market corrections happen about once per year on average. You could be selling your stock positions at the bottom of a correction and sitting in cash while the market recovers. How long would it take you to earn back that 10% sitting in a money market?
You need to put up with the volatility of the market to have a chance at achieving the great returns stocks have produced in the past. Don’t confuse risk and volatility. While past performance is no guarantee of future results, history has shown that those with a long time horizon have been better off staying put and riding out these corrections. Anyone with a short time horizon shouldn’t hold their money in stocks anyway. The right thing to be doing now is to review your portfolio to see if it needs to be rebalanced. Volatility is not something to be feared. It should be embraced for the opportunity it represents.