STEEP MARKET DROP: WHAT TO DO?

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” –  Peter Lynch

 

Global financial markets have had quite the month. Worries about China’s slowing economic growth, currency devaluation, and the stock market drop have sent investors into a panic and left global stock market averages much lower than they were a few weeks ago. With the 24/7 news cycle, Twitter, and other forms of social media all proclaiming the end of the financial world as we know it, investors should stay calm and not panic.

 

Fear of losing it all

I have heard stories of terrified investors selling out their entire portfolio as they are afraid of the market “crashing.” Is that a rational decision?

First, let me start off by saying that what is happening in China, comes as no surprise to market professionals. After all, how many cities with no one living in them can the communist government build? How long can banks give loans to virtually bankrupt, government owned corporations with no hope of ever getting the loans paid back? When you hear that regular Chinese retail investors are taking out big loans to finance stock purchases, does that not sound like a bubble?

I postulate that this is all an excuse, for the markets to do what they naturally do, and that is drop. Investors get spoiled when markets continually go up, but a 10-15% drop is relatively common and actually healthy for the stock markets long-term prospects.

The way that investors will “lose it all” is if the market would actually go to zero, and I don’t think even the most extreme pessimists believe that that will happen. Can the market continue to drop? Sure. As I have written here numerous times, my mother of blessed memory was fond of saying “a Naár is a navi” or, ‘prophecy was given to fools.’

It is important for investors to keep in mind that market drops like the one we are seeing now are not rare. Ben Casselman, the Chief Economics Writer for FiveThirtyEight, said, “What we do know is that market crashes, however you define them, happen. Since 1950, the S&P 500 has had one-day declines of 3 percent or more nearly 100 times. It’s had two dozen days where it fell by 5 percent or more. Slow-motion crashes, where big declines are spread out over several trading days, are even more common.”

 

What to do?

I understand it’s not fun to watch the value of your portfolio drop by 15-20% in a short period of time. But investors should not freak out, and should stay calm. As George Santayana said, “Those who cannot remember the past are condemned to repeat it.” In this case that means remembering that over time the market will rebound and head higher.

Casselman continues, “Every one of those declines has been followed by a rebound. Sometimes it comes right away. Sometimes it takes weeks or months. But when it comes, it comes quickly. If you wait until the rebound is clearly visible, you’ve already missed the biggest gains.”

I have been asked what I believe is the secret to building wealth. I answer that it is to buy quality assets, whether stocks or real estate, and just hold on to them. If you can buy them at a 20-25% discount, even better. What we learn time and again when the markets drop, is that if you don’t have the stomach for the volatility or you are worried that your portfolio will drop so much that you can’t fund retirement or that apartment purchase, then you have no business having such exposure to stocks.

 

You should invest what you can afford to lose, because in the short-term, no one knows how the market will behave.

 

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

 

Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.