19 Jun Should I worry when the stock market takes a dive?
Q. I know the stock market is much higher, but I still get nervous when I see drops of 300 points – it seems to happen more often. Do the drops not mean as much because the stock market is higher? At what point should I worry about all these drops?
A. Large swings in the stock market do seem to be more common these days, so you’re right to ask the question.
A day where the market drops hundreds of points can make any investor a little nervous, especially when 24-hour news cycles continually blast the headline drop.
It is on those days when it is most important to look at the decline in terms of a percentage, said Frani Feit, a certified financial planner with Tradition Asset Management in Summit.
For example, she said, a 300 point drop on a 25,000 Dow is 1.2 percent. As the markets have all moved much higher since the financial crisis, 100 point declines are not as meaningful as they were 10 years ago, she said.
Also think big picture: A market correction is defined as a drop of 10 percent or more. A bear market is a decline of 20 percent.
In the fourth quarter of 2018, we saw a peak to trough decline of almost 20 percent, she said. This was followed by a rebound in the first four months of 2019 of more than 16 percent, she said.
You mentioned market swings. Volatility is another word for larger market swings.
“There are investors who become very uncomfortable when the market becomes more volatile and I believe a lot of that has to do with their stage in life,” Feit said. “A 25-year-old who is dollar-cost-averaging into her 401(k) plan can use market dips as a buying opportunity to invest in quality stocks on sale.”
At the same time, a 63-year-old who plans on retiring in a few years and living off of his portfolio does not want to start withdrawing funds at a lower market value because once withdrawn, those funds will not have the time to recover their value, Feit said.
That said, there are ways to position a portfolio so that the closer one gets to retirement, the less susceptible to market volatility retirement funds can be invested, she said.
Feit said the question of when to worry is not just about anticipating market drops and how to react, as much as it is if you get out of the market, when do you get back in?
“Whether a portfolio is invested in 100 percent equities or 100 percent bonds or diversified – 50 percent equities and 50 percent bonds – there has not been a time period over a 20-year rolling period where any of these three portfolios produced a negative return,” Feit said.
So what should you do?
Have a long-term plan and find something else to focus on for the down days.
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This story was originally published on June 19, 2019.
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