What is going on with the Stock Market?Submitted by Blue Rock Wealth Management on March 6th, 2018
On January 23rd, the market had climbed to 26,600+ after opening just a year prior in 2017 less than 20,000. Then, volatility spiked and the DOW Jones Industrial Average got down as a low as 24,190 on 2/7/18, around 2,500 point decline. This equates to around a 9% step backward in only about 2 weeks. It took just over a year to gain 6,000 points but only 2 weeks to give back 2,500 leaving some shaking their heads.
Most people have some investment in stocks somewhere OR they should! -- 401k 529 plan, etc... so understanding stocks behave is important. I think it can seem really random and unpredictable unless you step back at look at a larger picture. Stock market declines are a natural part of investing. Here is some historical background to help you put market declines in perspective. while declines have varied widely in intensity, length and frequency, they have also been somewhat regular events.
|Type of decline||Average Frequency1||Average Length2|
|-5% or more||About 3x a year||47 days|
|-10% or more||About once a year||115 days|
|-15% or more||About once every 2 years||216 days|
|-20% or more||About once every 3/12 years||338 days|
Source: The unmanaged Dow Jones Industrial Average and American Funds - Market Declines A Little History 1 Assumes 50% recovery of lost value 2 Measures market high to market low. Past results are not predictive of results in future periods and one can not invest directly in an index.
So what does this tell us about declines? I think most importantly we learn that even in a good year, we should see declines of around 5% multiple times and a decline of 9% like we saw in Jan-Feb 2018 is not unusual at all and normally happens once per year. Psychologically the declines are so painful that even though they are short it can cause us to make emotional decisions.
What about market increases? With all of this craziness in prices do you end up with a positive return? Morningstar(c) would say yes (and I would agree) in their piece entitled Crises and Long-Term Performance Market declines in historical context, Jan. 1970–Dec. 2016. They point out how large US companies have still returned over 10% on average on this period in spite of several crises.
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Four market crises defined as a drop of 25% or more in the Ibbotson ® Large Company Stock Index.
Each time we have a new crisis or spike in volatility, you will hear calls that things are different this time calling for some radical action. During times of decline, I think it's a good opportunity to re-evaulate, maybe make some tweaks to your portfolio and maybe invest cash but rarely is it the best time to jump ship.
So, how do you deal with market declines? Prepare yourself mentally: Realize that the exact timing is unpredictable but over long periods of time you certainly see some consistency. Down times are a natural part of investing. They are usually short but so painful that it causes people to make mistakes. You also need to be properly diversified especially if you have been saving for a goal for a while and can't afford to take a big hit. If you aren't sure if you're in the right portfolio or know yourself well enough to know you will need some coaching when down times comes, you should seek professional guidance.
Listen here for recent podcast https://soundcloud.com/user-589432337/what-the-is-going-on-with-the-stock-market