As we continue to see volatility in the overall markets, I want to share my prospective.
Where are we?
We have been in a bull market since early 2009. With the length of a bull market averaging 8 years, it stands to reason we are overdue for a correction. The Dow Jones Industrial Average peaked on Friday, January 26, 2018, closing at 26,616.71. Over the next 6 trading days it fell to 24,345.75, an 8.53% free fall which could continue.
How did we get here?
There are a number of reasons for the current volatility. Last week we saw a better-than-expected jobs report. More people working means more consumer spending. When more money chases a product, prices rise; aka, inflation. The 100-year historical average for inflation is over 3% but we have been nowhere near that rate for quite some time. Rates cycle like everything else and we will see the Federal Reserve move rates higher over the coming months. How much and at what pace? That is yet to be determined. What you need to know is that interest rates and equity performance are negatively correlated meaning, when one goes up the other goes down. Think about it. If you can get 4-5% in a certificate of deposit at your local bank, chances are you will not take the risk of losing your money in the stock market for a potentially higher rate. Thus, when rates move higher money flows out of the stock market.
To compound these basic fundamentals, we are also at the mercy of computer selling. Savvy investors generally protect their stock positions by entering sell orders above and below the current market price. For example, the computer will automatically liquidate a position if a $40 stock trades at $50. They will gladly accept a 25% gain over the risk of holding the position and the gain erode. The opposite is true. The computer will automatically liquidate a position if a $40 stock trades at $30. They are not willing to lose more than 25% of their principal so they close the position. The reason I say we are at the mercy of computer selling is because we have no control over when and where these orders are placed. When the selling starts, less experienced investors become fearful and often liquidate as well. This continued pressure on the market can force it even lower.
What do we do now?
There is no one-size fits all investment plan. Your risk tolerance and time horizon (how much time you have to reach your investment objective) are two key factors to always keep in mind. With that said, here are some very simple guidelines you may want to consider.
If you are in your 40s, and your main objective is saving for retirement you can probably ride this one out.
If you are in your 50s, and your main objective is saving for retirement you should have no more than 50% of your assets exposed to stock market risk at any given time. Simply put you may not have time to recover from a sustained bear market.
If you are in your 60s, and your main objective is saving for retirement you have absolutely no business in the stock market. You can’t afford to lose any money you have worked to accumulate. At the same time, you can’t stick it under your mattress either.
At JondaKnows, we use strategies to help our clients protect and grow their money without the risk of the stock market. If you would like to know more, call 304.840.0001 to schedule your free, no-obligation consultation today.