Market Meltdown? Reason to Panic?

By Aradhana Kejriwal   |   August 25, 2015

stock market correction djia

The S&P 500 continued its decline. Yesterday, stocks were down 3.8% soon after the market opened. While the Dow Jones Industrial Average (Dow, DJIA) dropped over 1,000 points during the trading day, buyers stepped in to scoop up buying opportunities. At the close yesterday, the S&P 500 was off -3.94% and the Dow was off -3.57%.1

Yesterday’s market swings follow last week’s 5.8% decline, putting stocks closer to correction territory. Prior to this downturn, the bull market had experienced 1,418 calendar days without a greater than or equal to 10% correction, the third longest market without a correction in the last 50 years.2 The last time we saw the market correct was in 2011, and four years can be a very long time to the human mind.

We understand that volatility can be scary. The thought of outliving your wealth because of declining portfolio values can be frightening. The current volatility may be due to fear of a catastrophic slowdown in China and fear that the Federal Reserve will raise interest rates in September, possibly ending its long-standing “easy money” policy, or some other reason like September is coming and it’s hot outside. But whatever the reason, falling markets can bring our fears to the forefront!

So as you watch the market news, we advise you to keep some strategies in mind:

Don’t Panic

We don’t own a panic button and think investors shouldn’t either. We’re all human and emotions are simply a biological fact. Understanding that emotions can drive short-term thinking and erratic investing choices can help you avoid succumbing to the urge to sell stocks during market volatility. This recent article shows how costly emotional investing can be. That’s why at GV, we build diversified portfolios and incorporate systematic rebalancing and tax loss harvesting into our process. That allows us to take advantage of market opportunities instead of caving into emotions.

Market Corrections Are Normal

Though it can feel otherwise, the market correction we are facing now is a normal and expected part of investing. The current downturn could get worse and it could last a while, but history indicates that the markets recover. Since 1928, we’ve endured numerous market declines – and stocks have recovered each and every time. As shown on the chart, on average, market corrections of at least 10% can happen as frequently as once a year, and bear markets can happen once every 20 years.3 The key is not to react, as doing so often will make any temporary losses we experience permanent!

SMALL STOCK MARKET PULLBACKS ARE NORMAL

FREQUENCY BY SIZE OF DRAWDOWN, THRESHOLDS ANALYZED INDEPENDENTLY*
small stock market pullbacks are normal

Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. For illustrative purposes only. *Analysis based on each type (size) of drawdown being independent. For example, the market does not typically see four 5% drawdowns and one 10% drawdown in the same year, but rather those 5% drawdowns may compound into a single 10% drawdown for the year. Data are as of 1/31/15.

Market Losses Are Temporary

History suggests that regardless of whether the market has corrected or posted double-digit declines during the year, it has returned positive annual returns in 27 of the last 35 years, leading us to believe that short-term market movement is meaningless.

calendar yr returns vs intra-day declines

Source: J.P Morgan, Guide to Markets, U.S. 3Q 2015, as of June 30, 2015.

Despite even the large market declines of the Great Depression and the recent Global Financial Crisis, the markets have bounced back.

Diversification, Not Market Timing, Is What Works Over Time

Diversified portfolios have recently taken a beating as the Bull Market has been raging on. The S&P 500 has had a nearly straight run-up over the last seven years. However, such downturns in the markets remind us why we should remain diversified in stocks, bonds and other asset classes (based on your individual risk profile, of course) and not chase any one single asset class. In this recent webinar, we show why diversification is the only free lunch in town.

Folks, we have been here before!

Short-term memory can blind us from seeing the truth, and worse, from staying the course, and that can hinder our long-term financial planning goals. We believe that the current market corrections are part of a normal market cycle and these downturns can present us with buying opportunities. We believe that bargain hunters will step in and help restore stability in the market. We at GV are committed to taking advantage of these opportunities for our clients. Remember, markets trade on fundamentals and US market fundamentals remain strong as reflected in low unemployment, rising consumer spending, etc.

If you’re a GV client and are feeling anxious, please reach out to your advisor today!

Yahoo Finance

J. P. Morgan Asset Management

3 Investing with Composure in Volatile Markets

Aradhana Kejriwal

About the Author

Aradhana Kejriwal, CFA®, is JOYN's Chief Investment Officer and co-chairs the Investment Committee, which formulates and implements the firm's investment philosophy, strategies, processes and procedures. With 19 years of investment experience, she's a popular industry writer and speaker.

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