Ouch, it hurts. That’s the only way to describe what has happened in the market over the last couple weeks. Across the board all the major stock indexes, both domestic and international, have been in retreat. As a result, those of us who invest in equities have seen our accounts similarly fall. In addition, not surprisingly, whenever we have a retreat in the market, the doom and gloomers come out in force with the same old rhetoric that is the world is falling apart and that we’re going to go back into a market free fall like we saw a few years ago.
Before you, as an investor, act irrationally and let fear dictate your investment decisions, it is important to put things into perspective. First, it is important to understand what has happened. This recent downturn in the market is a direct result of a few different factors. The first is the slowdown in the Chinese economy. China is no longer a step child in the world economy; it is a major player. China’s economy which has been growing at a substantial pace has significantly slowed down and as a result, the Chinese had to reduce the value of its currency. The fear is that China’s economy will continue to slide and that it will have a domino effect for other economies around the world.
Another reason for the downturn is energy prices. A barrel of gas is selling for substantially less than it did just six months ago. As consumers, we are generally happy when gas prices fall because of the savings we feel at the pump. However, let’s not forget that over the last number of years because of fracking and other techniques, the U.S. is now a major player in the energy arena and as a result of lower energy prices, our economy and employment situation is adversely affected.
The last issue that is weighing on investors is what the Federal Reserve will do with regard to interest rates. The general thought had been that September would be the time when interest would begin to rise; however, the recent release of the Federal Reserve minutes seems to suggest that interest rates may not be going up as fast as people anticipate. It is this uncertainty that causes volatility.
Taking everything into consideration, how should you and I as investors react? My philosophy has always been that as investors, we must focus on our individual goals and objectives and not let fear and greed dictate our investment decisions. My philosophy over the years has been not to overact to market volatility. It is important for investors to recognize that market volatility and market corrections are the norm and, in fact, are healthy for the markets. Therefore, just because we’re having the correction doesn’t mean an investor should change their overall strategy. Portfolios should be built to survive market adjustments and corrections. Having a well-balanced and diversified portfolio may not always shine when the markets are doing well but they protect you during these times. Because market corrections and adjustments can’t be anticipated, for most of us the best strategy is to maintain a diversified and balanced portfolio so that market adjustments, although painful, will not be catastrophic.
I cannot stress enough how important it is for investors not to overreact to this latest downturn in the market. In today’s world where everything is at hyper speed, anything can happen over the short run. Therefore, investors who overreact may find that when the bounce back occurs, they’re not in the right position.
Do I know how long this downturn will last — no. I wish I did. But the reality of the situation is that no one does. As I have said thousands and thousands of time in the past, it is impossible to time the market. Despite what some people say, no one has been able to do it consistently and you shouldn’t try. My advice, don’t overreact and those of you who have been sitting on cash, this may be a great opportunity to jump back in.