Now and then, investors get a vivid reminder that stocks can fall as well as rise. It happened in the first quarter of 2018 when volatility returned with a vengeance after a year of steady gains for stocks in 2017.
Experienced investors know that ups and downs are a normal part of stock markets and should not be a cause for panic. But there’s no denying that volatility can be nerve-wracking and painful and can spur investors to make costly mistakes. Understanding the forces behind turbulence can help investors stay calm and focus on their long-term financial goals. The recent upheaval has triggered warnings of bigger stock market corrections ahead, so there’s no time like the present to regroup.
Let’s look at what happened: During the first quarter, stock prices gyrated and the Dow Jones Industrial Average plunged 1,000 points in a single day, not once, but twice. The turmoil officially became a correction on Feb. 6 when U.S. stock markets dropped by 10 percent from the most recent high. When all was said and done, U.S. stocks produced their first quarterly loss since 2015.
Economic and geopolitical pressures were clearly a factor, as skittish investors grappled with rising interest rates, talk of tariffs and trade war, and heated rhetoric over nuclear buttons. And when volatility is in the air, the trend accelerates, as computer-driven trading models kick in and drive prices, asset flows and trading strategies to extremes.
Any investor who wants to navigate volatility should repeat this mantra: Markets are cyclical. Even positive news, such as the recent string of strong employment reports, gives way to negatives. When employment is high, increased competition for workers pushes up wages, which in turn, depresses profit margins and triggers inflation.
The truth is that no one can consistently predict when market corrections will occur, how long they will last and how deep they will be. Even investors who successfully “get out in time” have solved only half their problem, because they then have to figure out how and when to return from the sidelines.
While they are not exactly predictable, market corrections do follow some patterns. Between 1948 and 2017, markets declined on average by 5 percent or more three times a year; by 10 percent or more about once a year; and by 20 percent or more about every six years, according to an analysis by Capital Research & Management, a leading U.S. mutual fund management company.
So, what’s an investor to do?
As riveting as markets can be during both rallies and routs, the answer to this question is pretty straight-forward: Stay focused on the long-term goals you’ve established in your financial plan and remember, one of the keys to creating wealth is time “in the market,” not timing the market.
Here are some specific tactics to consider:
Embrace dollar-cost averaging*. By investing steadily in fixed amounts when stock prices are low, you will be accumulating more shares than you would when costs are higher.
Review your asset allocation**. Market corrections can throw your portfolio off-kilter, and rebalancing is an opportunity to restore equilibrium. Selling some of your assets that have been doing well and replacing them with unpopular assets can be scary, but it is a classic example of the principle of “buy low, sell high.”
Assess your readiness for retirement. If you are within five years of retirement, a market correction is a reason to sit down with your advisor and assess whether you need to do something more aggressive than simply stay the course.
Make a plan. If you don’t have a formal plan in place, think about creating one. A roadmap is never more valuable than when you are navigating rocky terrain.
*Systematic investment plans do not assure a profit or protect against loss in declining markets.
**Asset allocation programs do not assure a profit or protect against loss in declining markets. No program can guarantee that any objective or goal will be achieved.
Let the Certified Financial Planner™ professionals at Williams Asset Management help with your wealth management needs. Whether you need comprehensive and holistic financial planning or investment management, we can help! We are fee-based, independent financial advisors located in Columbia, the heart of Howard County, Maryland. Schedule your complimentary consultation today by calling (410) 740-0220!
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