The Stock Market Just Dropped Over 1100 Points. What Should I Do?????
The stock market has been in the news a lot lately, but the story flipped in the last few days. Since late 2016, media reports have practically been gushing about new market highs and how each 1,000 point gain in the Dow Jones Industrial Average has been faster than any previous 1,000 point gain in history. Then, there were two sharp declines last week, followed by a decline of 1,175 points today – the largest one-day point drop in history.
At this point, it is perfectly logical to be asking, “What does this mean and what should I do about it?” If you are invested in the stock market, especially in a retirement plan, the ups and downs are unsettling. This is money you need for real things – money to fund a secure retirement, college educations for children, or a new house. While the upside surges may be encouraging, the sudden shift to a drop is unsettling.
The first thing we want to point out is that this happens. While the point drop on Monday was severe, the 4.6% drop in the Dow and 4.1% drop in the Standard and Poor’s 500 (the index that probably matters more to your retirement plan results) aren’t that uncommon. There was a much larger single day drop in August 2011 – 5.6% on the Dow and 6.7% on the S&P. The point drop that day wasn’t as high as this week because the indices have increased more than 100% in the 6-1/2 years since then. So that drop wasn’t a sign of impending doom.
But sometimes a bad day is a sign of a larger, longer market decline. The large single-day declines in the fall of 1929 and the fall of 2008 were signs that the stock market was in real trouble and were followed by further losses as the economy unraveled. Many models of stock market valuation have been indicating that stock prices are historically high, so this could be the start of a real shift in market prices and a real decline in stock prices of 20% or more.
If that is true, then what should you do?
The first question to answer is whether you have an asset allocation plan. What is that? It is a long-term strategy for allocating your money to cash, bonds, and stocks. This plan should consider your age; ongoing income; the size of your investment portfolio; when you will need money from your investments; and how changes in the value of your investments affect your emotions. That last point is important. An asset plan can check all the boxes set by a computer program or an investment advisor, but if it leads to changes in value that leave you unable to sleep then it didn’t work.
If you don’t have an asset allocation plan, now would be a good time to sit down with a financial planner who will help you develop one. It might have been good to do it before a market decline, but “late” is definitely better than never. Developing a plan that can work for you can help improve your financial future and prepare for the next shock in the markets – whether that shock is a stock mania or a panic.
If you do have a target asset allocation, that still isn’t a “set and forget” answer.
The first thing you need to do is balance back to that allocation on a regular basis. If you haven’t been resetting your investment accounts over the last couple of years, you probably own more stocks than the target in your plan even after the declines of the last week. This would still be a good time to rebalance, so the risk in your investments is back to the level you prefer. That won’t mean you are immune from stock market declines, but they should lead to losses that don’t derail you from meeting your goals.
And if you recently rebalanced and have less money in stocks than your asset allocation plan indicates, congratulations; you lost less today than you would have. But don’t count on your timing being this good regularly. If you want to wait a bit to see how the market settles out before balancing back into stocks, that isn’t a bad idea. Looking at the long term, being under-allocated to stocks for a few months isn’t a tragedy, since the market goes up more slowly than it goes down.
The other thing to consider about your asset allocation plan is that the targets shouldn’t stay fixed over time. As you get closer to needing the money in your investments for, well, living, your allocation to safer investments can increase. The long term return to stocks has been higher than for other investments (including gold, Beanie Babies, and Bitcoin), but stocks can lose a lot of value in a very short time, as we saw again today. It’s not good to have $1,000 converted to $800 when you will really need the $1,000 in the next couple of years. Your target allocation may not change between ages 30 and 40, but as you approach retirement, you really should talk with a financial planner about what you need to do to reset your targets to reflect how soon you may need the money. You may be able to avoid this step if most or all of your investments are in “target date” mutual funds from providers like Vanguard, Fidelity, and others. These funds should be automatically shifting their target asset allocations as they approach the target retirement date in the fund’s name.
As the ads for financial products say, always talk to your financial advisor before making an investment decision. If we are your financial advisors, we would be happy to talk with you. If not, we’d like to be. Call 513-794-1829 or email jim@1taxfinancial.com to get started.
Jim Iverson, CFA®