By: Matt Garrott
“With the market in turmoil, what should I do?”
During any market correction, investors often ask: “with the market in turmoil, what should I do?” This question implies that you can actually control your returns independent of the markets and that you should be constantly buying and selling in reaction to what is happening in the moment. This implication is only fed by the talking heads on TV, with varying opinions on what you should do “NOW”. However, this type of thinking runs counter to your interests as a long-term investor.
I was putting my five year old son to bed the other night when I told him his favorite pajamas (Snoopy, if you must know) were in the wash. His little body could not contain his sorrow as his entire world crumbled around him. In his mind, the pajama market was in turmoil and his beloved Snoopy pajamas would never return. With a longer term perspective, I knew that while he was upset today, his diverse portfolio of pajamas would serve him well, especially since his taste in pajamas changes with little to no warning. He can’t control when his pajamas get washed, but he can control his expectations, and soon enough he’d be wearing Snoopy again.
The stock market is not in turmoil right now. It can be easy to forget what turmoil looks like even though we saw it only a few years ago during the financial crisis. Instead of market turmoil, what we are experiencing is market paranoia. There is a bogeyman around every corner and any news update can be used as an excuse for further negativity. Vanguard Investment Strategist Andrew Patterson says the biggest threat to the market right now is fear. The perception of strength or weakness is driving the market now rather than actual results. That said, volatility is a normal and necessary part of markets and today’s market movements are not outside of historic norms. Over the last 40 years, we’ve seen double digit drops in the S&P 500 sometime during the calendar year in more years than not.
Don’t fall for slick fear-based marketing now. We get pitched investment products constantly. We hear promises of “upside participation with downside protection” from many salespeople. Sadly these promises almost always fall flat. It feels like someone should be able to solve the markets since it’s all just numbers, right? Well it turns out that it’s not all just numbers. Especially in the short run, markets are ultimately based on humans, humans are irrational and as such, near-term market movements don’t always make much sense and are impossible to predict.
So what should you do now? Maybe nothing, sometimes the best advice in turbulent times is to not feel the need to react. No matter what, you should act based on your long-term financial plan. If that plan is to rebalance when asset allocations fall outside of certain parameters, do that. If it calls for harvesting losses, do that. Maybe your plan doesn’t call for any action at all right now and that’s ok. If you feel like you need to draw up a new financial plan every time there is market noise, it’s time to re-evaluate your goals and expectations and perhaps come up with something that will let you sleep at night.
