Stock markets around the globe experienced a good deal of market volatility last week and it continued today. Concerns over the pace of global growth and the possibility of the U.S. Federal Reserve increasing short-term rates in September sent most major global stock markets down. In the U.S., the Dow Jones Industrial Average officially dipped into correction territory (i.e., when an investment declines 10% or more off of a recent high).
Sudden sell offs like these are unnerving. We feel it is important to keep you informed during these bouts of volatility. In fact, we’d like to share three perspectives on market volatility and corrections to help us all keep a broader perspective on these events.
1. Stock market corrections are normal and healthy
As we have shared in the past, stock markets move in cycles. There are periods of time when they go up and periods of time when they go down. Rarely do stock markets go in a single direction for a long time.
It would seem hard to believe, but when we look back to 1900 on the Dow Jones Industrial Average, there has been a 10% decline on average about once a year (source: American Funds). If there has been one abnormal fact about the market recently, it is that there hasn’t been a decline of 10% or more since October 2011.
2. No one knows when a stock market correction will occur
Trying to guess when a stock market correction will occur is futile. While many people will be tempted to say that they knew this was coming, the fact is that it is just a guessing game. We’ve heard some of the talking heads on TV call for a large stock correction since 2012. If those stock traders were out of the stock market because of their concerns, they would have missed out on substantial gains.
3. Global diversification helps smooth out volatility
We are often asked what we do to prepare or react to this type of stock market volatility. Our strategy of diversification helps prepare us for normal market swings. We diversify our portfolios into stocks, bonds and alternatives all around the global so we aren’t beholden to the whims of one country’s stock or bond market returns. Effective diversification like this helps smooth out the overall volatility in our portfolios.
While we would enjoy seeing our investments go up every day, we know that isn’t realistic. If fact, we could easily argue that we should welcome volatility since it typically makes markets stronger by realigning fundamentals and also opening the door for future potential gains…and preventing big bubbles.
We’ll close by reminding everyone that the U.S. stock market has recovered from every prior stock market correction in its history. Additionally, stocks go up more often than they go down, so keep focused on the long term and your goals.
If you have any questions or concerns, please call.