We sent the following note to clients and friends after stocks slumped world-wide this week, with U.S. and European markets off more than 5% and the Shanghai Composite Index losing more than 11%.
August 22, 2015
The natural inclination after the stock market falls sharply like it did this past week is to take action. Do something! But here’s the rub. You own stocks to achieve long-term goals. So unless your objectives have changed in the past few days, it’s probably not prudent to abandon your investment strategy based on a market gyration.
In today’s Wall Street Journal, Jason Zweig provides an excellent description of how NOT to react:
Don’t fixate on the news.
The more often you update yourself on the market’s fluctuations, the more volatile and risky it will appear to you even though short, sharp declines of 5% to 25% are common. The U.S. stock market has, in the past few years, been extraordinarily placid by historical standards. Even the sudden drops of the past few days are well within the long-term norm. Fixating on fluctuations in the short term will make it harder for you to remain focused on your long-term investing goals.
Don’t be complacent.
You should use the latest turbulence as a pretext to ask yourself honestly whether you are prepared to withstand a much worse decline. Did you make it through the epic bear market of 2007-09 without selling all your stocks? Are you extremely well diversified, with plenty of cash, some bonds, and with large and small stocks from markets around the world? Then you can probably weather a further decline. But if you sold in earlier bear markets or you are heavily concentrated in a few stocks or sectors, you should consider raising some cash or diversifying more broadly to protect against the risk that you will take even more drastic action at the worst time.
Don’t think you — or anyone else — knows what will happen next.
After a market drop, or at any other time, no one knows what the market will do next. The one thing you can be fairly sure of is that the louder and more forcefully a market pundit voices his certainty about what is going to happen next, the more likely it is that he will turn out to be wrong. Stocks could drop another 10% from here, or another 25% or 50%; they could stay flat; or they could go right back up again.
Diversification, patience and, above all, self-knowledge are your best weapons against this irreducible uncertainty.
If you want to read a different version of this evergreen advice, check out Ron Lieber’s article in today’s New York Times, Take Some Deep Breaths, and Don’t Do a Thing.
It’s normal to worry a little, but if your investments are positioned properly for long-term success, you shouldn’t lose sleep over blips in the market. I invite you to give me a call anytime at 704-350-5028 if you want to talk more about this.
Enjoy the rest of your weekend.
Chris Mullis, Ph.D.