Dear Friends and Clients,
A couple of weeks ago, the stock market fell 400 points. Then again earlier this week, it fell some 200+ points. While I could speculate on the causes, that is not necessarily a productive use of time. The bottom line is that my colleagues and I do not see anything fundamentally wrong with the stock market at this time.
As we have discussed in the past, stock market investors should maintain a diversified portfolio that meets their long-term goals and personal risk tolerance thresholds. They should be prepared for daily volatility in the markets, cyclical ups and downs, and periodic corrections.
In up-markets, you will hear me saying that “trees to do not forever grow to the sky”, meaning that the stock market can’t go up and up forever without some sort of correction.
When a correction or “blip” in the market performance occurs, as has recently been the case, my message to you is this: The Chicago River may be green this Saturday for St. Patrick’s Day, but it is highly unlikely that the river will be anything but its normal brownish color come Sunday. In other words, this too shall pass.
While I am not prone to making market predictions, I do believe that the recent market downturn is very short-lived. Cycles are normal. Historically we have had a 10% correction every two years and a 20% correction every five years. This could be one of those normal corrections, but I doubt it. I also disagree with Greenspan regarding a possible recession by year-end 2007. If it in fact does happen, it will not a big deal for long-term investors - only for those who happen to lose a job.
The current market conditions may remind you a bit of 1987 and 1998. The 500 point drop that we saw in 1987 was a real biggie and scary (The Dow was at 2,000 then, not 12,000). Most experts could not explain the dramatic one day crash, yet many value money managers, while concerned, were buying because of the unbelievable values. I recall the market was in the 20+ P/E (price/earnings) range. Today the market is less than 15 P/E and the recent drops have amounted to a 3 1/2% decline, NOT 25%! Yes corporate earnings are slowing (I thought they would last year). The market recovered quickly in 1987-1988. Remember 9/11/2000? We experienced a huge and quick recovery from that precipitous drop.
So here’s what to do … or perhaps what not to do, now:
If you are in your accumulation years, now would be a good time to be buying properly-researched investments (stocks and equity mutual funds). Remember the old adage “Buy low. Sell high.”? Hint: When the market has recently fallen, it’s LOW. It’s time to Buy! If you have a tax refund that you’re looking to invest, or you have a planned IRA contribution coming up, now is the ideal time to get into the equity market.
On the other hand, if you are reaching the end of your accumulation years and/or entering the distribution phase of your life, you will not want to make any rash decisions based on the market’s short-term volatility. Give yourself a 30-day moratorium after any big market event – whether up or down – and give me a call before you make any buy or sell decisions. Don’t fall prey and “sell low” because you are panicked or making irrational (fear-based) decisions.
Since 1980, our economic growth cycles have averaged 5+years and the average market downturn has averaged less than 12 months!
The fundamental message I am trying to communicate to you is this: if your financial plan and investment strategy was sound a week ago, it is still sound today. Unless something has changed in your life, it is unlikely that you should take radical action. Of course, there is always the possibility that you do not feel your current plan is “sound.” If you feel it is time for a financial check up, or if you would like to discuss the market conditions as they relate to your personal financial strategy, I am happy to sit down and consult with you.
Please call my office to schedule a review and consulting time if you are worried about the markets and/or your personal finances. Or perhaps it’s just time to talk. I am here for you, whenever you feel the need for professional investment and financial planning advice.
