Plan for Volatility in the Markets
Updated: May 26
Anybody who reads the headlines knows by now that the United States stock markets plunged yesterday. The S&P 500 fell 2.98% and is down 5.83% over the past five days. In the bigger picture, this is a pretty modest drop for a market that was up 17% so far this year, and some analysts were surprised it wasn't worse.
There will be a lot of noise about the actual cause of the drop. The result is typically the same for most market volatility, uncertainty. The policy decisions that are being made by two superpowers are creating a tremendous amount of uncertainty. How will this impact companies and consumers? How will this impact trade among these and other countries? There are so many elements that go into making economies thrive. When there is a disruption to the known flow for an economy, the shift causes pause and potentially pull back.
We have been here before. It may look different this time, but uncertainty exposes its beautiful face on a regular basis. Would it be nice to have calm and predictable markets with outcomes already calculated? I suppose for a while, but everything would stagnate, and growth would begin to wither. This uncertainty helps economies innovate and produce better outcomes for the future. This is a better path, even if it gets a little uncomfortable along the way.
At times like these, it’s important to put current conditions into perspective. This is not the first time the market has taken a tumble and it won’t be the last. Declines in the Dow Jones Industrial Average are fairly regular events. In fact, drops of 10% or more happen about once a year on average. And please remember, no matter what you hear, no one can predict the future. Some may guess right once or twice but that does not make a sound investment strategy for your financial future. You need to participate in the investment markets through the good and the bad to achieve the financial success we all hope to achieve.
Most want to believe that people that study the markets every day should have some insights that you do not. Let me ask, do you know what tomorrow will bring for you? Can you predict how your day will go and control every element of the day? This his highly unlikely. Something will throw off your plans and you will have to adapt. But it is likely that if you have set a goal for the future, the disruption in that one day will not likely derail your long-term goals. The markets work the same way only with more variables and complications.
To protect yourself during the time of uncertainty, it is best to be prepared and have a plan. The plan does not involve buying and selling based on the latest news. The plan revolves around you and your personal circumstances. Diversification is a great place to start. Simply, how much do you own in stocks, bonds and cash? How much do you own in foreign markets? How are you allocated within these investments? Your needs and circumstances should drive these decisions, not the latest news.
Does the market drop signal the end of the bull market? Nobody can say for sure, but it seems unlikely, given that the U.S. economy is still healthy and enjoying the effects of a recent Fed stimulus. Second quarter earnings on the S&P 500 (with 387 of the 500 companies reporting) stand at $42.13, which is comfortably ahead of the $40.70 forecast for the quarter. There doesn't seem to be an apocalypse on the near horizon, though at any moment the long bull market could turn bearish for anywhere from a few quarters to a year or two. History has shown that when stocks go suddenly on sale, due to a startling of the investment herd, it's an opportunity to buy, rather than a good time to sell. But for the next few days, the markets will have our attention, even if there is no plan to take dramatic action.
If you or your loved ones are worried about their financial plan, we are happy to offer a complimentary portfolio review and recommendations. We can discuss what is appropriate for the immediate needs and long-term objectives.
Sometimes simply speaking with a financial advisor may help investors feel more confident and less concerned with the day-to-day market activity. We’re never too busy to help you or those you care about, so please forward this if you know someone who needs our help.