The memory of the awful bear market in 2008-2009 is still impacting many investors. On Friday, August 21, 2015 the Dow Jones Industrial Average dropped 530 points. The weekend break was followed by tons of media predictions of a “Wall Street Meltdown”. Monday morning began with the Dow dropping more than 1,000 points in the first few minutes of trading, which was generally attributed to the global reaction caused by the growing fear of China’s slumping economy.
Fearing a repeat of the 2008-2009 bear market, some investors saw this as the right time to cut and run before things get worse. What do you think – is selling after the market drops the right thing to do? Let’s start with the assumption that no one knows what is going to happen to the market (although there is never any shortage of opinions). There are no crystal balls. As I write this post, the stock market is down more than 10% from its peak this year. By definition, that means we are officially in a stock market correction. Corrections normally happen on average about once a year. If you move your investments out of the market now, you could be selling your stock positions at the bottom of a correction and sitting in cash while the market recovers, waiting until you feel comfortable about getting back in. Have you considered how long it would take you to earn back that 10% “loss” sitting in a money market?
Market volatility is the price you pay in order to have a chance at achieving the returns stocks have historically produced. Don’t confuse risk and volatility. 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 of less than 5 years probably shouldn’t hold their money in stocks anyway. That portion of a portfolio that might be required in those 5 years should be in more stable and reliable vehicles like bonds and cd’s even though they are not paying much right now. Stay put, review your portfolio to see if it needs to be rebalanced and wait for the market to recover. Volatility is not something to be feared. It should be embraced for the opportunity it represents.