The last week of stock market drops has taken the S&P 500 into correction territory for the first time in two years. While still in an upward, bullish trend, the S&P 500 fell officially into correction territory on Thursday, down more than 10 percent from its record reached in January.
One theory about why the market may be correcting now is because of a fear that the economy is too strong and complacent. The fear is that this can lead to inflation, which may cause the fed to raise interest rates too high too quickly and cool down growth.
Another concern is that the yield chase over the last 8-years and the low interest rate environment have created an extremely risky situation for retirement income planning. The threat of higher interest rates creates uncertainty in the stock market as it can potentially make stock dividends less attractive. Remember, uncertainty causes volatility which can lead to sudden corrections in the markets.
An obvious lesson for investors during this bout of volatility is that periods of uninterrupted returns don’t last. A correction is a normal part of investing. When markets correct, you can’t control their length or severity, but you CAN control how you respond.
The recent dramatic pullback in stocks has created a buying opportunity if you follow the stock-buying theory of “buy-low, sell-high”. I have no idea where the market goes next. It may continue into a longer-term correction or it might go back to its January highs. One thing is for sure, you had to put some money to work if you were smart enough to take some profits off the table at the end of 2017.
This brings me to an important point of enlightenment: if your Financial Advisor didn’t put at least some money to work in this correction – you need to FIRE HIM!
The job of a good “Financial Advisor”, no matter what they call themselves: CFP, CHFC, etc., is to make sure that you are allocated properly and have money available to buy stocks when they go on sale. You are paying him to keep you calm and help prevent you from panicking and selling your investments at the wrong time. Furthermore, your advisor should have made sure you didn’t get greedy in this bull market and took steps to help you take some profits so that you had money to deploy when stocks got cheaper.
Understand that I do not endorse “market timing” which is specifically being “all in” or “all out” of the market at any given time. However, it is extremely important to have a methodology for buying and selling investments.
Also, if you are getting close to retirement or already in retirement, it is critically important to understand that avoiding major drawdowns in the market is the key to long-term investment success. The long-term results of avoiding periods of severe capital loss will outweigh missed short-term gains. Small adjustments can have a significant impact over the long run. The best …