Volatility has returned to the stock market! Historically, the long, steady upward march we’ve seen over the past year and a half has been unusual. Even when the economy is good, it is normal for the market to have ups and downs. Occasional corrections are actually healthy for the market, even though when corrections happen they often feel scary.
If you are concerned about your investments, the three most important things you can do this week are to review your plan (get a plan if you don’t have one!), understand what you own, and keep the big picture in mind. Doing these things will help you sleep well knowing your investments are on track, even during market pullbacks.
Have a plan.
Your investments should always serve a purpose. That purpose might be to prepare you for and sustain you in retirement, to send your kids to college, or to ultimately benefit a charity or cause that you believe in. Do the planning first, then select investments that have a high probability of achieving your goals. Investors who plan well, properly diversify, and pick the right stocks for the long run can sleep well at night even in times of market turbulence.
Know what you own, and why you own it.
Investors in volatile products learned a hard lesson this week. Some investors had large positions in “exchange-traded notes” that are difficult to understand, and they lost value as a result.
Investing doesn’t have to be complicated. Sometimes the simplest solutions are the best ones. When it comes to long-term investing, it’s hard to beat a carefully crafted, well-diversified portfolio of great companies.
Learn from history; keep the big picture in mind.
On Monday, October 19th, 1987, the Dow Jones Industrial Average fell 22.6% in a single day of trading. This was one of the most rapid single-day corrections in stock market history. The market ended 1987 with a slight gain for the year. One of the most tumultuous days in market history is barely visible on long-term charts. Most of the time, things aren’t nearly as bad as they seem during a market correction.
Smart investors see market corrections as a buying opportunity. We don’t encourage investors to attempt to time the market. Staying fully invested is a better strategy than attempting to time the market. If you have a plan and understand what you want to buy, a market correction is a great time to put your cash to work.