When the Market Drops What Should You Do?
The Market Sell Off- What’s an Investor to Do?
Over the last week, the market has dropped significantly. Investors, fresh off
the market crash of 2008, are nervous. So, what should an investor do?
In 2008, the market crash was a result of economic problems with banks,
insurance companies, and Fannie Mae . Today’s market volatility is more
political than economical. S&P downgraded the US because of our debt. The issue
was never about default, but because of the Country’s debt. What a downgrade is
telling us is that what we need, as a Country, is to cut spending, or at least,
control it. While economically we are still soft, we are in much better shape
than in 2008.
The biggest obstacles investors have is themselves. Investors tend to get
panicked, think about getting out of the market, or going to cash. These are the
actions that guarantee an investor a loss. As in 2008, when the Dow hit a low of
around 7400, it quickly rebounded in the second half of 2009 and continued to
climb until July 2011. Investors that sold, got out of the market, or went to
cash learned a severe lesson- they locked in their losses. An investor that
stayed invested probably made a gain.
Investing in the market will be volatile in the short-term. Investing is a
life-long strategy. Investors need to control what they are capable of, and
that’s their risk tolerance. A globally diversified portfolio can help the ease
of wild fluctuations in the market. Investing in US stocks, International
stocks, and short-term bonds should help reduce risk to one’s portfolio. A high
concentration in any of these asset classes can result in additional risk. When
investing in bonds, short-term bond portfolios will help reduce risk the most.
Individual bonds, corporate bonds, municipal bonds, and long-term bonds (over 10
years) should be avoided.
Currently, the market has been ’selling off.’ An important message that
investors should know is this: In order for the market to sell off, there has to
be someone on the other side buying! So what should investors be doing now?
Buying of course! That is how investors make money, buying low and selling high,
not buying high and selling low. The great hockey player, Wayne Gretzsky, when
asked on how he became a legend replied “I skate to where the puck is going.”
Investors should take that lead, invest to where the market is going. Nobody
knows if the next 20% movement in the market will be up or down, but overall,
it’s gone up 100% of the time! Investors can greatly enhance their portfolios by
taking advantage of market downturns in a positive way. Buy stocks. As Warren
Buffet says “Be greedy when others are fearful, and fearful when others are
greedy.” Sounds like great advice investors should follow.
Accredited Wealth Management Advisor (AWMA)
Chartered Retirement Planning Counselor (CRPC)
1981 Midway Road Suite C
Menasha, WI 54952