WHAT IS GOING ON WITH THE STOCK MARKET NOW? WHAT DO I DO?
By MARY LYNNE DAHL, Certified Financial Planner®
February 29, 2020
(SitNews) Ketchikan, Alaska - This week, as of February 29, 2020, we have seen a sharp decline in stock market prices, over 4,000 points, making this drop officially a “correction” of 14%. Foreign markets are in a sharp decline also, and there is a reason for this.
The reasons for this market drop in share prices is that the market likes the certainty of knowing a lot of data, like the earnings of companies, their profits and losses, taxes, hiring and firing, growth and recession indicators and other kinds of data that companies use to plan ahead. No successful company operates by the seat of the pants, at least not for long, and the market knows this. So it likes the certainty of knowing these things. What it does NOT like is uncertainty. There are risks associated with uncertainty that are hard to deal with because they are unexpected.
The uncertainty that worries the market the most right now is COVID 19, the coronavirus that is being called a pandemic, worldwide. It is an unknown, a real risk to health, but also a real risk to businesses all over the world. China has been economically hurt already, with factories shut down for weeks. China is the world ‘s main factory today. Almost everything is made there. All of the widgets for almost any kind of product come from China. It is a vital link in the supply chain of virtually every type of product that someone manufacture, sells, buys and trades. When the economy of China is hit hard with bad economic conditions, the effect ripples across the rest of the world.
Meanwhile, the virus is moving around the globe rapidly. In the US, we are fortunate enough to have a great system of medical care, with a lot of resources to deal with a virus like COVID 19, but that does not mean it not a threat to us also, so our own economy is now asking some important questions about preparation for it, treatment of it and the effects of it on business and life in general in the US. It is concerning, to be sure, and that concern, coupled with the risks to business, is causing a lot of uncertainty.
And this is exactly what makes our markets unhappy. Uncertainty is the bane of stock markets.
So, should you do something? React to all of this?
Your investments may now be down in price, but that is not a signal to sell them just because their share prices have dropped. You know the reason why they have dropped. It is uncertainty. If you own good quality mutual funds, ETFs, stocks and bonds, they are down in price because the entire market is down in price, not because the shares of all those companies are actually worth less. Some are worth more, much more. They are down in price for now but not forever, especially the really good quality companies. So hang in there. Buy more if you have some cash suitable for investment. Be picky and make some really good choices; buy quality. This is a chance to get some good shares at bargain prices, if you have some extra cash.
What you should not do is sell now, in a panic. Just do not do that. It is absolutely the wrong thing to do in a market slide. I know a lot of people will do this, and they will usually admit later that it was a mistake. Eventually, the market goes back up, and they are left with no way to recover their losses. Once they sell those shares, they convert their paper losses to real losses, and then it is too late. All market corrections and all market crashes eventually end, and once they do, those share prices rise again. You have to know this as an investor, and you have to be emotionally strong enough to wait it out. Buy more if possible, but if not, wait it out.
Based on the long bull market that we have enjoyed for over 10 years, it may take 18-24 months for a strong correction to turn around and start back onto an upward trend in share prices. It may seem like a long time to wait, but a patient and smart investor should have invested with this in mind at the beginning. Every good investment strategy takes into consideration the fact that markets are not static and will move down as well as up. It is built into every good financial plan. Knowing this in advance, before you become an investor, is an important part of building a solid long-term financial plan and investment portfolio, no matter how small or large it is.
Ignore the media noise, the headlines, the doomsday prognosticators, the people selling newsletters and super-duper techniques for market timing and market magic. Ignore all of this. Many if not most Wall Street traders are young, too young to have had much experience with a market crash, so they do not know from experience what they are talking about. In addition, traders on Wall Street are short term thinkers, not long term. They make money off of trading, not holding. They rarely look longer down the road than next week. Some of them are just trying to sell you something, and in a correction or crash, it is based on fear. Fear is the wrong reason to sell shares.
Instead, listen to logic and reason. Invest only in quality shares. Have a plan and stick with it. Never panic. Review your plan and your investment strategy periodically, yearly for most people, or when there is a compelling reason to do so, like retirement or college. Seek advice from professionals who are not selling something, like a book or newsletter, or a product such as a stock, mutual fund, annuity or insurance policy. Buying based on fear generated by a correction or crash is generally not smart. Smart investors do not fall for a sales pitch when markets get to a dizzying high (greed) or a depressing low (fear).
Take Warren Buffet as an example. He is certainly recognized as a smart investor, maybe one of the smartest around today. When asked how he plans to sell a stock after buying it, his answer is that when he buys a stock, he does not plan to sell it at all. His explanation for this is that he believes that if it is good enough quality for him to own it, he plans to keep it, not sell it later. His perspective is not to buy and sell (trade) stocks, it is to own them. That requires a long-term view and careful selection when he does buy. When he has sold shares, it is generally because he no longer wants to own them. Nearly 90 years old now, he has no plans to get out of the market at any time. He relies on stocks and bonds to produce the results that he wants. That is his plan and he sticks with it, year in and year out, regardless of the ups and downs of the market. We can do the same thing, and if we are smart, we will, in fact, do the same thing, which is buy the best quality shares we can find, in types of investments that suit our own specific goals and tolerance for risk and seek specific results at each stage of the investment plan that we are in.
This requires discipline. Having a plan is the road map that outlines the discipline we can summon when markets get crazy. An experienced, objective advisor, if you use one, is the hand you should hold when you need to review the plan and apply that discipline. If you do your own thing, remember the examples of people like Warren Buffet. Do not panic. Do not cave in to the media hype and rush to sell or get out of the market. Stay the course. If your investments were good quality to begin with, keep them in place rather than sell them in a correction or bear market downturn.
We know that markets fluctuate up and down, so this current correction should not be scary. The virus that is the catalyst for this correction may be scarier than the ups and downs of share prices. Pay attention to that, instead.
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