REMINDER: Markets Don’t Go Straight Up!

Most equity markets were down 3% today, and most equity are markets down 5% this week! It’s the worst week for the Dow since 2011! The Dow is now in correction territory. What’s going on???

It’s been an unusual year. January and February were quite good. But not much has happened since then until this week’s market sell-off.

China’s apparent slow-down seems to be the main catalyst to what triggered this week’s ugliness, but we continue to have the uncertainty as to when the Fed will raise rates, if/when Greece will leave the Euro, and mixed second quarter earnings reports and economic news.

It is times like these that investors need to remember that markets don’t just go straight up. Markets don’t work that way- they go up and down! Not every calendar year can be an “up” year. As a long-term investor, you not only stay invested, but even may see this as an opportunity to buy more.

There have been over a dozen market pullbacks of 5% or more since March 2009. This is another one! Generally, when the market comes back, it does so quickly. So, it’s a fool’s game to try to time the market and jump in and out of it. No one has a crystal ball. Furthermore, we know that over time that staying invested is your friend. Studies show that just missing a few days of strong returns (which we could very well get next week or later this month), can drastically impact overall performance.

The market constantly over-reacts and then reverts back to the mean. Do not get caught up in emotion and sell and buy at the worst times. Unfortunately, humans are not wired for disciplined investing and usually trade poorly based on fear. They wind up selling at the lower prices (on fear) and buying at the higher prices (on elation) per the graph below.

Emotions

I’m sure many readers are nervous after this latest week with all this uncertainty in the air. However, if you use a wealth manager, like DWM, we can help you focus on what can be controlled:

  • Create an investment plan to fit your needs and risk tolerance
  • Identify an appropriate asset allocation target mix
  • Structure a well-balanced, diversified portfolio
  • Reduce expenses through low turnover and via passive investments where available
  • Minimize taxes by using asset location, tax loss harvesting, etc.
  • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling at high points
  • Stay Invested

In closing, a pullback / correction like this one might actually be a very healthy thing because it may signify that the underlying assets’ valuation is getting back in line with fundamentals. So don’t get anxious over this latest short-term market volatility. By all means, there is a lot of “noise” this month. We’ve seen “noise” before and we’ll see “noise” again. Instead, remember that, over the long-term, the markets have rewarded discipline, through world events of all types. Check out the graph below, put your mind at ease, and have a great weekend. Let us deal with the “noise” and give us a call if you’re still feeling anxious next week.

Markets Have Rewarded Discipline