By now you may have heard about last week’s decline in the stock market and wonder how that might impact your investment accounts.
Friday’s 530 point drop in the Dow Jones Industrial Average punctuated an already difficult week by shedding a total of 3.5% off the index. This decline barely takes us into the technical definition of a stock market correction since reaching its all-time high in May. A correction is defined as the downturn of an index of at least 10% and is considered very common. Historically, they happen approximately every two years, but we have not seen a correction since October 2011.1,2,3
There are a number of reasons for this volatility including the softening of oil prices and other commodities and the possibility that the Federal Reserve may tighten interest rates in September. But a major contributing factor is the fallout of China’s slowing economy, which we have been expecting for quite some time. 4
To put things into perspective, it’s important to point out that the S&P 500 has more than doubled in value since March of 2009. The index has averaged just under 10% over any 25-year period in recent history, which includes periods of tremendous economic stress. That can be good news for long–term investors who are able to view these fluctuations as short term static against the bigger picture of the fantastic bull run we’ve seen.5
I want to assure you that our long-term investment strategy has not significantly changed in light of last week’s performance. The past 25 years in the financial services industry has taken me (and many of you who have been with me over the decades) through similar downturns. An asset allocation appropriate for your goals and a conservative withdrawal rate during retirement can still be more important factors than short-term fluctuations of the stock market.
I will continue to suggest appropriate portfolio adjustments as circumstances warrant, but at this time I am generally discouraging any drastic responses.
Stock market drops like these can be good opportunities for those of you new to the firm who are holding cash on the sidelines. If this applies to you, please expect a discussion toward developing an appropriate buy-in strategy.
In closing, I am keenly aware that some of our clients may find the current conditions stressful. No one can tell with certainty where the bottom of this downturn might be, but I can assure you that I am keeping a close eye on the economic factors that can drive market fluctuations.
In the mean time, If you have questions or concerns, please don’t hesitate to call or email me.
I look forward to speaking with you soon.
P.S. If you have friends or family who are concerned that the investment mix in their IRA’s or other investment accounts may not be suitable for their goals, please forward my name and number to them. I will do my best to help point them in the right direction.