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The Sky Is Falling! Why You Shouldn’t Panic About the Stock Market

The drop in stock prices yesterday was quite dramatic. With that, all the “gloom and doom” pundits came out to play and the media has the latest crisis of the day to cling onto. Am I worried? I have three words for you: Not one iota. This is why you shouldn’t worry:

-This is Normal: Over time, the stock market periodically suffers declines such as this. And this is nothing. For example, since 1979 the S&P 500 has lost over 5% in one month on average once every 13 months. It happens a lot more than you think.

-This is Natural: Periodic declines are natural in the stock market and it’s a good thing. Why? If there was no risk in investing in stocks, accordingly we wouldn’t be adequately compensated for taking the risk.

-You Can’t Predict or Control It: Who predicted that the Dow would drop 400 yesterday? No one did. And no one can predict when the right time to get in or out of the market is. No one can predict what is going to be the “next hot thing.” It’s funny just to see the news commentary; one article quoted an institutional investor that cited a technical indicator last week and claimed that this was a precursor to the trouble. This stuff is silly; if the person could predict good and bad things to come on a consistent basis, they would be independently wealthy and working for themselves. The financial media absolutely does a horrible job of making people focus on these issues; the culture of selection and timing. And it does more to erode wealth than any of our politicians can conjure up.

-You’re OK – As Long As You're Doing Things Correctly: If you truly are investing, you have an ongoing discipline that takes into account the periodic downturns in the market. This means having an adequate defensive reserve on hand to cover short-term needs to tide you over during market downturns. For the individual who is still working, this is having an adequate emergency cash reserve as well as cash funds earmarked for large expenses anticipated in the near future. For the retiree, this means having cash, bonds or other risk controlled investments to cover the next two years of cash flow needs that aren’t covered by your pension or Social Security. These are for when things go wrong. If you couldn’t afford to lose the money that you lost yesterday, you aren’t investing – you’re speculating.

The overriding theme that I want to convey is:

If you are doing things right, what happens today, tomorrow or in the short-run has no bearing on your long-term results.

Who knows what today will bring for the global stock markets. I have my guess and so does everyone else. The thing is that you shouldn’t let the markets lead you by the nose. You should base your asset allocation; the dominating factor within your investment strategy that dictates performance over time on your needs. Being proactive about your needs will always win in the long run. Being reactive and a slave to irrational “Mr. Market” only creates a lot of emotional and financial pain. In the end, I will continue to be as well as be rewarded for being an optimist.

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