I sometimes struggle to understand why you are so surprised when the market declines. Then I remember the role of the financial media.
It plays on fear, anxiety, and greed.
Bad and good headlines
Here’s a recent headline describing a 1% drop in the S&P 500 index on January 30, 2018:
How to make sense of the S&P 500 drop of over 1%.
Here’s what the headline should have been:
Long anticipated market decline finally occurs.
There’s no need to “make sense” of a market decline. They occur frequently. According to Vanguard, from January 1, 1980, to the present, there have been 11 declines of 10% or more and 8 bear markets, with declines of 20% or more.
That’s all the explanation you need. Take no action.
The “explanations” for market declines often recommend a course of action, like trying to predict the future direction of the market or changing your asset allocation to reduce risk.
Resist the temptation to “do something.”
Vanguard’s analysis showed that 12 of the 20 best trading days from December 31, 1979 through January 31, 2018 occurred in years with negative annual returns. If you had “fled to safety,” you missed out on those returns.
Changing your asset allocation is also risky and inadvisable. One thousand dollars invested on October 9, 2007, at the peak of the market, was worth $1,927 on February 5, 2018. Investors who reacted to bad news (like the Lehman bankruptcy and the housing crisis) and exited the market, had significantly lower returns.
When you understand the history of market corrections, your reaction should be a collective yawn. Ignore the financial media. Let others panic. Stick with your well-thought-out plan and don’t be swayed by the financial media or the securities industry that supports it.
If in doubt, you can always give me a call.