What to Expect When the Stock Market Gyrates - Part I
When markets gyrate, I find it helpful to remind myself (and my clients, as necessary) about the nature of stock market investing:
#1 Corrections are Not Exceptional – While it may be a small consolation when you see your investments shrink, drops of 10% or more in the overall market are not unusual; they have occurred in about half of the calendar years since 1950. A long period of stock market expansion without such a drop is actually what is rare. Tip: Build your investments and overall financial plan to handle these declines. Do not invest monies into the stock market that you need to provide a steady monthly income.
#2 Markets are Unpredictable – Knowing this reality should mean that we are not shocked when commodities, like oil, fall significantly in value. These price declines have been great for the consumer at the gas pump, and they will be good for the economy because the dollars not spent on gas can be spent elsewhere. However, plunging oil prices have pummeled the value of oil stocks. How many predicted this sharp decline two years ago? Not many. Tip: Don’t go “all in” on any one area of the market, like energy stocks, just because they look cheap based on historical prices. A profit-producing turnaround may take some time and it may be preceded by further declines.
#3 Risk of Loss is Inherent – When stock values go up, it is easy to forget the inherent dangers. The stock market is no lady. It is a tiger that can cause you significant harm. A tiger may purr and gently lick your hand while you are feeding it meat through the bars of a cage. It may even seem to smile at you ... but, if you encounter that tiger uncaged, you may become its prey! The same is true for the market. The stock market fell 47% over a three-year period from 2000 to 2002. Could you stomach that? And, if you did need your money during such a prolonged downturn, could you afford to only get back 50 cents on the dollar? Tip: Don’t invest funds in the stock market that you know you will need within three to five years.
Next week I’ll outline what you should, and should not, expect from a financial adviser during a period of volatile stock market activity.