Worried about the recent sell off in stocks? So are the client's of Robo Advisers.
Take a deep breath and relax.
This is a perfectly normal market occurrence.
Here are three things you need to know to maintain your perspective.
1. Points Versus Percentages
Have you ever noticed the media likes to headline points instead of percentages? Sure, the Dow fell over 1,800 points over the last two trading sessions. That’s one big scary number.
Yet, from a percentage standpoint, that is only 6.8% drop from the 26,616 intra-day trading high the Dow set last month.
2. This is not 1987
I will never forget the crash of 1987. Back then, I was studying finance in college and participated in a stock picking contest with my classmates. Needless to say, I didn't do too well.
After the Dow ran up 44% over the one year period leading up to the crash, it then plummeted 508 points on Black Monday of October 19,1987. A 22% drop in a single day.
From peak to trough, the Dow fell from a high of 2,746 in July of 1987 to 1,833 in October of 1987. Two years later, the Dow recovered and went on to hit a new record high of 3,000 in April of 1991.
While yesterday's 1,175 decline was considered the greatest point drop in history, it was a drop in the bucket compared to Black Monday's percentage drop.
3. The Long Term Trend Is Your Friend
In trading circles, everyone tells you the trend is your friend. Since Black Monday, the Dow is up more than 20,000 points, This coincides with a healthy retiree's investment time horizon of 30 years or so.
I can't possibly predict the future of the market, but there is a decent chance the Dow will recover from this minor stumble and be significantly higher ten or twenty years from now.
This is why you need to look out decades versus days when it comes to planning your investment portfolio.
Monday's drop offers a perfect opportunity to asses your risk tolerance and make sure you are not taking on more risk than needed to reach your financial goals.
If your portfolio has fallen more than 10% in the last week or so, you are taking on more risk than the overall market.
Consider this market drop a warning shot across the bow in order to get your portfolio in check.
Give us a call if you would like to schedule a risk review.
For further reading, check out these solid commentaries:
People Are Worried About the Stock Market
Putting Recent Market Volatility in Perspective
Source of Dow Returns: Yahoo Finance