U.S. stocks ended a defensive week in the red as investor sentiment deteriorated in the face of fresh worries out of China. For the week, the S&P 500 fell 5.77%, the Dow lost 5.82%, and the NASDAQ slid 6.78%.[i]
When markets take a dive, it’s natural to worry about what’s happening and where markets will go next. However, part of being a stock investor is taking market swings in stride. Now is the time to stay cool-headed and focused on your long-term goals. On that note, here are 4 things that you definitely should not do after last week’s market pullback:
Don’t listen to the talking heads. The selloff is happening in the middle of a seven-year bull market. As of Friday, the S&P 500 has gone 1,418 calendar days without a 10%+ drop (between 10/3/11 and 8/21/15).[ii] Regardless of what the media is saying, the S&P 500 is down just 7.51% since its peak in mid-May.[iii] Markets experienced a similar selloff in September and October of last year. However, the talking heads have taken this widely anticipated pullback and made it sound like 2008 all over again. Remember – the media’s goals are not aligned with yours. They want to keep viewers glued to their televisions and newspapers, waiting for the sky to fall. Out in the real world, we’re taking a look at the numbers behind the selloff and making prudent adjustments where we feel it’s necessary.
Don’t panic and hit the eject button. Corrections are a normal part of market cycles. Since 1927, the S&P 500 has experienced pullbacks of 5% or more about every 3.5 months.[iv] While the past can’t predict the future, research shows that panicking and exiting the market is often the worst thing you can do when markets swing. Investors are notoriously terrible at picking market tops and bottoms; since periods of high growth often occur during turbulent times, investors who sell off and sit on the sidelines frequently miss out on the good days.
For example, an investor who stayed fully invested in the S&P 500 between 1995 and 2014 would have experienced a 9.8% annualized return. However, if they had traded in and out of the market, missing just the 10 best days of the market, their return would have plummeted to just 6.1%. Six of the 10 best days of the S&P 500 fell within two weeks of the 10 worst days.[v]
Don’t think like a day trader instead of an investor. Stock markets are driven by fear and greed. Right now, traders are in full-on fear mode and are selling off indiscriminately at any hint of bad news. Long-term investors are taking a look around and seeing what opportunities the pullback is offering.
Don’t get complacent. Pullbacks offer you the chance to ask yourself if you’re honestly prepared for a correction. If you have a prudent strategy and a well-diversified portfolio, then you’re better prepared for a potential correction. We don’t know whether the current selloff is a short-term blip that will reverse in a few days or the beginning of a deeper slide. However, domestic indicators are trending positively, and we believe that there is room for a resurgence.
We are keeping a very close eye on markets worldwide and will update you as needed during the evolving situation. While we can’t predict where markets will go in the next days and weeks, we focus on in helping clients manage their wealth in many market environments.