The markets over the last few weeks have been horrible. We have experienced the worst 2 New Year’s opening weeks in the Dow and S&P in history. Even for the most experienced and informed investors these types of markets can feel scary. Nonetheless there is a difference between a temporary sell-off and a true market crisis.
For most of us, 2008 is not a distant memory. No one wants to suffer through massive declines followed by recession twice in one decade, and many have the fear that these two weeks are the dreaded black swan event ushering in a terrible year. Fortunately, we are in a much different place today than we were then. The U.S. economy is healthier by far, with low unemployment, low interest rates, strong housing, a consumer that is more of a saver and less of a borrower, healthier banks and more. None of the domestic weaknesses that led us to the 2008 scenario are present today. That being said, we do face some severe negative pressures from China, Russia, Brazil, and other regions that are struggling in the face of recessions, currency and commodity issues. Continued dislocation in China will certainly have an effect on earnings around the world, but many analysts say it is a shock that the markets can withstand. Add to that the vexing double effect of low oil prices that both stimulate the consumer, but harm the oil companies; and the strong dollar, which on the surface should be a good thing, but really diminishes our competitive edge in the export market, and we find investors justifiably overwhelmed and uncertain. It is important to remember though, that even when markets have declined sharply in the past for a variety of very good reasons, the markets managed to recover. Missing that recovery has for many investors proved to be their biggest mistake.
The advisor's job is to help the client stay the reasonable course with cool heads and discipline. Market timing, the act of getting into and out of markets based on what we think is about to happen next, is a fool’s game. Stepping aside and investing solely in cash or ultra conservative assets might be effective if cash needs are imminent, but that’s not most investors. Most investors are in it for the long haul, and are adding to their investments through regular additions to retirement plans. For those in that group, these tempestuous ups and downs are opportunities to buy good companies at a discount to their normal market multiples. The markets may decline more. In fact, it is likely that they will continue to be very volatile in the near term. But, this unnerving volatility should not be taken as a sign of greater doom just yet. There’s a lot of good in the fundamentals to help weather through this storm.
So what should you do when faced with these types of crazy markets? Although it is important to shield yourself from the sensationalized reports of the market news channels, that doesn’t mean you should ignore your investments. The most critical thing to do is talk to your advisor. This is when your advisor can really have an impact on your long term results. Make sure you have the right allocation, and that you are rebalancing even in these types of markets in order to maintain the right risk level for your portfolio.
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The story about the U.S. economy remains positive. Unemployment seems to have reached a trough just below 4% while not leading to horribly negative effects on productivity, and showing mild wage inflation, concentrated in certain areas of the economy.Read full story here