Does that headline make your stomach turn? Is your reaction to call your financial advisor and sell your stocks or stock funds? What if the decline was 5,000 points along with headlines of an impending recession?
The Dow hasn’t plunged 3,000 points but it wouldn’t be at all unusual. It may not happen in a day, but it certainly could happen over a few weeks. In fact, a normal decline for this year would be a drop of over 4,000 points or about 14% from top to bottom according to research from JP Morgan. The Dow may fall from 30,000 to 26,000 or it may fall from 35,000 to 30,000. But it does get volatile from time to time and it’s been a while since we’ve seen the normal level of volatility.
Depending on how your portfolio is invested you may not see as big a decline in your holdings as the stock market. The Dow is an index of just 30 large US based stocks. You probably have a more broadly diversified portfolio and maybe even some small cap or international stocks. Unfortunately, stocks are highly correlated and a drop in the Dow is generally indicative of broader stock market returns plus or minus a few percentage points.
Bonds often will do well or at least hold their value when stocks decline but there have been times when they’ve dropped at the same time. And real estate investments, while a different asset class, sometimes go in their own direction and sometimes move with stocks, especially the traded REIT (Real Estate Investment Trust) stocks.
If you have a habit of putting your investments into the latest top performers you may well have a portfolio heavily invested in the large cap growth stocks that have led the way over the past few years. That may leave you more vulnerable to the inevitable correction.
The time to review your portfolio allocation and risk level is not after you see a headline like the one above, but now. It’s hard to take your profits and re-allocate when things are going well and much too easy to panic and sell low after the drop.
If you’ve got a well thought out plan that you can stick with through the next decline that’s great. If not, learn more about how we proactively manage our clients portfolios through the inevitable market cycles.