It’s happened many times before, but when we experienced a serious downward move in stocks in late August, it caught many investors off guard since we hadn’t been through such a shift for quite some time. Beginning on August 18 and ending on August 25, the Dow Jones Industrial Average lost nearly 1,900 points or more than 10 percent of its value—a significant drop in a condensed period of time. At the close on August 25, 2015 the Dow Jones Index actually fell more than 14 percent from the year-to-date high it reached in mid-May.
More surprising than the drop itself may be that it had been roughly three years since the U.S. stock market experienced a correction of at least 10 percent.2 Historically, such corrections tend to happen more frequently—on average once every two years since 1932.2
Markets move in unexpected ways
Stock markets are notoriously unpredictable in the short term. The events of August 2015 are a reminder that the markets can move quickly with little or no warning. Nobody can say with certainty what will happen to stocks over the next week, month or even over the next year. For example, by early March of 2009, U.S. stock markets had lost more than 50 percent of their value over an 18-month period. The Dow Jones Industrial Average bottomed at 6,547 and fears were running high. At that point, many investors likely didn’t think they’d see the Dow Index around the 18,000 level that it reached this year in May of 2015.
It’s not about the markets—it’s about you
It is important to look beyond the headlines and instead keep the focus on what you are trying to accomplish with your investments over time. Short-term market fluctuations are a fact of life, but they should not drive investment strategy. It is important to assess your willingness to accept investment risk in conjunction with the goals you are trying to achieve. A market correction may be a good time to step back and re-assess what you are trying to accomplish with your portfolio. Here are some things to consider:
If you have years to let your money grow
If you are still several years from retirement, there may be less reason to be concerned with short-term market swings. Make sure your portfolio is positioned in the most effective way to achieve your long-term goals consistent with the amount of fluctuation you are willing to accept over shorter periods. If you don’t feel your portfolio is aligned with your goals given the recent bout of volatility, it may be time to work with a financial professional to reposition it.
If you are investing regularly in the market (such as contributions to your workplace retirement plan or an IRA), the volatility could work in your favor through dollar-cost averaging. This is a method of investing that helps reduce the risks of market timing by investing a fixed amount at regular intervals. When prices are low, your investment purchases more shares. When prices rise, you purchase fewer shares. Over time, the average cost of your shares will usually be lower than the average price of those shares. It does not assure a profit or protect against losses in a declining market. However, over longer periods of time it can be an effective means of accumulating shares. Investors should always consider their ability to continue investing through periods of low market prices.
If retirement is drawing near
Those who are within a few years of retirement tend to be more sensitive to short-term market moves and may want consider making some adjustments to their portfolios. This could include keeping more of your assets in less volatile investments that can help diversify stock market risk. Yet it’s still important to balance the need for growth opportunity as well as less volatile assets with the likelihood that your retirement could last for two-to-three decades or longer. Your next move really depends on what stage of life you are in and how close you are to retirement. Now would be a good time to talk with financial professional about your portfolio.
The outlook? More unpredictability
If there is one thing we can count on in the days ahead, it is more speculation about where the stock market may be headed. Various experts will voice different opinions about whether a further correction is in the cards or a major rally is on the horizon. Don’t be overly concerned with what you may read about in the papers or hear from TV pundits. Your own financial goals and the time you have to invest should guide your investment decisions.
William “Drew” Watson, CFP® is a Financial Advisor and Private Wealth Advisor with Ameriprise Financial Services, Inc. in Owensboro, KY. He specializes in fee-based financial planning and asset management strategies and has been in practice for 20 years. To contact us by phone, please call 270-684-8424 or by mail at 111 West 3rd St, Owensboro, KY 42303. You may also visit our website at www.williamawatson.com.