Based on the number of calls I am receiving from worried clients, I am guessing most of you are feeling some concern regarding the steep slide in the market. The stock market has now corrected over 10% from its recent high. This happened because of today’s 500 point drop.
Market crashes are normal. Volatility in markets is normal. Markets are irrational.
Volatility is the price a market investor pays for the possibility of a return greater than the 1% return a safe and secure savings account will earn. Nothing fundamental with the companies you own has changed from two weeks ago when the markets were higher. What has changed is that people are feeling fear and trying to calm the anxiety they are feeling by “getting out.” It’s predictably irrational.
About 80% of our clients weathered the crash of 2008 – 2009 without making a change in their portfolios and were rewarded for their patience. They’ve seen positive returns over the past three years in excess of those they would have seen had they gone to cash in 2008. The 20% that sold some stocks at what turned out to be the bottom of the market in 2009 now painfully understand how selling at the wrong time can negatively impact your returns.
Historically, summer is a bad time for the market while winter is generally favorable. I’ve told clients since April to expect their great returns of the first four months of 2011 to look a lot worse by September. The market hasn’t disappointed.
So, my advise is boorish and predictable. If you are going to do anything, INCREASE your exposure to equities right now, rather than decrease. Stocks are on sale. They may be even more on sale by October. No one knows. What you don’t want to do is make the big mistake and sell out during a market correction or crash.