Recent Market Events – What They Mean For the Long-Term Investor
If you have seen any news about the stock market recently, then there is a good chance you have noticed the negative performance over the first few weeks of the year. In fact, the first two weeks of 2016 were the US stock market's worst start to a calendar year in history, including the Great Depression era. Headlines like the previous sentence often receive a second glance, yet cardiologists do not always have time to fully investigate events in the global markets, what these mean for them, and what action, if any, they should take. This article will review some of the key macroeconomic events that have driven recent market performance. We then provide three principles for the long-term investor that has many years until retirement.
What has been going on recently?
2016 has started with sharp declines in both the domestic and international markets. One of the contributing factors is the Chinese economy and stock market. While their stock market has experienced a sizable drop over the opening weeks of the year, we see this as a continuation of deflating a bubble and it may not necessarily reflect the true state of the Chinese economy. Nevertheless, this is casting doubt on whether the world's second largest economy is slowing down, which would affect their demand for certain goods, such as commodities like oil. In addition, the OPEC nations and others that produce the majority of the world's oil have not been able to agree on curbing their output, which has contributed to the decline in the price of oil due to the shift in supply and demand. While this may impact short-term revenues and profits of multinational companies, we remain optimistic about the long-term prospects for investors.
What does this mean for me?
During periods of heightened market volatility, we encourage long-term investors to remember three principles:
Time horizon Understand that the majority of your money invested in the stock market is likely earmarked for retirement, and therefore has a long-term time horizon. While a market downturn is not ideal for investors who need to liquidate their investments soon, you do not need to sell for many years and therefore have time to let the market recover. Market dips provide a good buying opportunity for long-term investors.
Keeping emotions at bay One of the more common mistakes investors make is succumbing to their emotions (sometimes influenced by the media or colleagues) and selling at an inopportune time during a market dip, precisely when they should remember their long-term time horizon and not make short-term decisions that could have lasting effects. Realizing that you will be a net buyer of stocks over the next couple of decades can help shift your mindset from perceiving a market downturn as a negative event to a positive opportunity. When the market has dropped lately, think of stocks and equity mutual funds as "being on sale" compared to their previous prices.
Dollar cost averaging We like to see long-term investors continue their regular ongoing contributions and investment purchases independent of how volatile the market has been or is believed to be going forward (if they are in the position to fund their savings plan). This concept, called dollar cost averaging, takes advantage of price swings in investments by buying more shares when they have decreased in value.*
We feel keeping these three concepts in mind will help you immensely over the next several decades.
It is also important to understand that the media's job is to report current events and, from time to time, they may do this overzealously. If you feel yourself being influenced to deviate from your investment plan by what you hear in the news, we would suggest you revisit the three points above. Occasional market corrections are a natural and healthy part of any economy, one we feel long-term investors should embrace and not fear.
This post was authored by Marshall Weintraub and Michael Merrill, CFP, CLU, ChFC.
Marshall Weintraub & Michael Merrill are financial advisors with the independent financial services firm, Finity Group, LLC. To ask them questions or arrange a consultation, email them at Marshall.Weintraub@thefinitygroup.com. Office Address: 4380 SW Macadam Ave, Suite 245, Portland, OR 97239. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Finity Group, LLC and Cambridge are not affiliated. * Investing regular amounts steadily over time (dollar-cost averaging) may lower your average per-share cost. Periodic investment programs cannot guarantee profit or protect against loss in a declining market. Dollar-cost averaging is a long-term strategy involving continuous investing, regardless of fluctuating price levels, and, as a result, you should consider your financial ability to continue to invest during periods of fluctuating price levels.