Have your long-term financial goals changed in the last four days?
Are American companies becoming less valuable because investors in China are panicking?
Is there any reason to think that because Chinese investors are panicking, that Chinese companies are less valuable today than they were a few days ago?
These are the kinds of questions to ponder as you watch the U.S. stock market catch a cold after China sneezed. In each of the first four trading days of the year, China closed its markets due to a rapid fall in share prices—a move which may have made the panic worse, since it made investors fear being trapped in stocks that are seen as dropping in value. It’s unclear exactly how or why, but the panic spread to global markets, with U.S. stocks falling 4.9% to mark the worst first-of-the-year drop in history.
For long-term investors, the result is much the same as if you went to the grocery store and discovered that the prices had fallen roughly 5% across the board. At first, you might think this is a great bargain. But then you might wonder whether the prices will be even lower tomorrow or next week. One thing you probably WOULDN’T worry about is whether prices will eventually go back up; you know they always have in the past after these sale events expire.
Will they? The truth is, nobody knows—and if you see pundits on TV say with certainty that they know where the markets are going, your first impulse should be to laugh, and your second should be to check their track record for predicting the future. Without a working crystal ball, it’s hard to know whether the markets are entering a correction phase which will make stocks even cheaper to buy, or whether people will wake up and realize that they don’t have to share the panic of Chinese investors on this side of the ocean. The good news is there appears to be no major economic disruption like the Wall Street derivatives mess that triggered the 2008 downturn. The best, sanest investors will once again watch the markets for entertainment purposes—or just turn the channel.
I overwhelmingly hear pundits predicting a bear market in 2016 (a bear market is defined as a 20% or more decline from the last market peak). “The bull market has gone on way too long, economic data is deteriorating, the Federal Reserve is raising interest rates, geopolitical events spell doom, we’re heading for a recession, oil is going to $1 per barrel” are all reasons our markets are headed for a tumble. Remind yourself that no one knows for sure what might happen, and while a bear market might assert itself in 2016, no one can reliably predict when it will come. All we know for certain is that it sets up opportunities
So what should you do? If you’ve enjoyed nice gains in your portfolio from this bull market, then you should consider cashing in some of those gains. It never hurts to take some money “off the table” and have some cash reserves to take advantage of better prices. Don’t panic sell–wait for the inevitable bounce that always comes after a multi-day selloff. You’ll be glad you did.
If you’d rather not tax the tax hit on your gains, there are ways to hedge your portfolio so you can at least sleep better at night. Speaking of that, if you’re up at night worrying about your portfolio, then you need to figure out whether you’ve taken on too much risk for your temperament and investing time horizon. You should first discuss all of this with your financial advisor/planner. Don’t have one? We’re glad to help.
As for our clients, we’ve been raising cash and doing some hedging ourselves over the past year. While there are some concerning recent economic trends and technical market anomalies, we don’t see signs of an impending recession on the horizon. We look for indications of a recession, because recessions usually lead to bear markets.
Nothing in this note should be construed as investment advice or a recommendation to buy or sell any security. If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.
The MoneyGeek thanks guest writer Bob Veres for his contribution to this post
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