Investors get spoiled when markets continually go up, but a 10-15% drop is relatively common and actually healthy for the stock markets long-term prospects.
It is only when the people become ignorant and corrupt, when they degenerate into a populace, that they are incapable of exercising their sovereignty. – James Monroe
Contrary to what the polling data was predicting, the vote last week was in favor of the Brexit. What exactly that technically means, and how long the breakup of the UK from the EU will take and in what form is anyone’s guess. I am not going to go into whether it was a good move or not. Well maybe just a bit! I think it was a very smart move, and re-instills my faith that there is still some sanity out there. I am not going to delve into why I think it was a good vote, other than by saying that the aforementioned quote from Monroe hits the nail on the head. Sovereignty is paramount.
End of the world
I would like to focus on the outcome of the Brexit and investors portfolios. Immediately after the results were announced, markets started to plummet. TV, print and social media were abuzz about how we could be headed into a big recession and that this result will make the financial crisis of ’08 look like child’s play. Talking heads were urging investors to dump stocks to salvage what they still have. After the market continued to drop on Monday, those calls were amplified.
Investors get spoiled when markets continually go up, but a 10-15% drop is relatively common and actually healthy for the stock markets long-term prospects. If you aren’t prepared to lose money over the short-term in the stock market, you shouldn’t be owning stocks in the first place. Highly regarded investor Peter Lynch said, “You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
I have written this before but it’s important to mention again. Investors need to keep in mind that market drops like this are not rare. Ben Casselman, the chief economics writer for FiveThirtyEight, said, “What we do know is that market crashes, however you define them, happen. Since 1950, the S&P 500 has had one-day declines of 3 percent or more nearly 100 times. It’s had two dozen days where it fell by 5 percent or more. Slow-motion crashes, where big declines are spread out over several trading days, are even more common.”
What to do?
I understand it’s not fun to watch the value of your portfolio drop by 5-10% in a few days. But investors should not panic, and should stay calm. As George Santayana said, “Those who cannot remember the past are condemned to repeat it.”
In this case that means remembering that over time the market will rebound and head higher. Casselman continues, “Every one of those declines has been followed by a rebound.
Sometimes it comes right away. Sometimes it takes weeks or months. But when it comes, it comes quickly. If you wait until the rebound is clearly visible, you’ve already missed the biggest gains.”
What is the secret to building wealth? Buy quality assets, whether stocks or real estate, and just hold on to them. If you can buy them at a 20-25% discount, more power to you.
What we learn time and again when the markets drop, is that if you don’t have the stomach for the volatility or you are worried that your portfolio will drop so much that you can’t fund retirement or that apartment purchase, then you have no business having such exposure to stocks. You should invest what you can afford to lose, because in the short-term, no one knows how the market will behave.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.gpsinvestor.com or email firstname.lastname@example.org.