If you haven’t noticed (and great for you if you haven’t as it means you’re not distracted by financial “noise”), there’s been a steep downturn in the markets over the past week. The Dow is down almost 5% from it’s high, and many are wondering if this is the beginning of the end of the great bull market we’ve had for the past 9 years. Well I have some good and bad news for you.
The bad news is that markets behave very irrationally in the short term, and if investors get panic-stricken, contagion can ensue. Fundamentals mean next to nothing in the short term, so the fact that the economy is in pretty good shape over all won’t matter if there’s a “run on the banks”.
Compounding this is the fact that we’re more than overdue for a correction. The current bull market has lasted 102 months (3rd longest on record), significantly longer than the average of 47 months. While that doesn’t mean we’re at the end per se, it logically will likely occur sooner rather than later.
For starters, remember that corrections are normal, healthy, and unavoidable. Folks who would like to avoid them are pure market timers, and the people I’ve watched hurt themselves the most are the ones who have made timing-based decisions and whip-sawed themselves unintentionally. Conversely, so long as you have enough cash and investments set aside in conservative assets like bonds, you don’t need to be concerned about when the inevitable corrections occur.
The other good news is that stocks are relatively cheaper than they were. If you’ve been sitting on any cash unnecessarily, the markets are actually a bit safer to invest in right now than they were a few weeks ago. We haven’t hit a technical correction yet (drop of 10% or more), so things will certainly fall further whether it’s now or two years from now. But even if this is the middle of a correction, we could be almost half-way through it. And if it’s not, then things may bounce back rather quickly and this would be a good buying opportunity.
In the end, who knows, really? Nobody. Not me, not you, not your brother-in-law or friend at church. The experts don’t know either. What we do know for certain is that the markets will go up and down, stocks will be riskier than bonds, but over the long term stocks will reward investors more than bonds. So if your time frame is long, so should your investment strategy. That doesn’t mean you should throw caution to the wind, but it does mean you should strive to eliminate anxiety and worry if you feel it, and turn off the financial news channel if it makes you feel uneasy. After all, that’s their job and they’re pretty good at it. Mine is to eliminate emotions from the process, to be a sounding board if you need it, and to help you reach your goals.BACK TO NEWS