Falling Stock Markets, what now?

Falling stock markets are dominating the financial press this week. Have you heard all the panic in the media? Crazy right?

In times like these I am reminded of a blog post I read some time ago that changed my opinion of investing in stock markets.

The post outlined how stock indexes had performed over a long period of time. I was immediately drawn to the amazing growth in stocks over many years. It was a light bulb moment…

…and then I kept reading the detail.

The blog post went on to show the returns if you removed the ten best days or the ten worst days of the year.

This is when things got really interesting, and what led to my change in opinion.

I can’t recall the exact numbers, but when you removed the ten best days from the returns of the index, the growth was a lot less impressive. I mean a lot!

Suddenly the stock markets where looking rather flat and boring in terms of capital growth.

Falling Stock Markets

In the past couple of weeks we have seen falling stock markets around the world. To date markets in most countries are off around 10% from the highs.

In most financial market discussions, 10% is considered a correction. This is a way of describing that stock prices have risen steadily for a period of time and run out of steam.

Now when we say a period of time, the US has been in a ten year bull market, which is a long time in stock markets.

falling stock marketsEventually markets have to take a breather. This is what most gurus call a correction. A combination of profit taking by the big players and something to spook markets and we get a correction.

Normally after a correction, the buyers quickly return and push prices back to the highs and even beyond.

All the fear that falling stock markets create is forgotten and everyone starts buying again.

You can argue that a correction is a great time to get a bargain. In fact, I can almost guarantee that the media and gurus will be out making that suggestion in the next few weeks, if this is a correction.

The Big If

Now the end of that last sentence contained a very big ‘if’.

You see, if this is not a correction, and in fact becomes a ‘crash’, it becomes a whole different scenario.

Crash is a term the media love, it creates great attention grabbing headlines, especially for those investors who are now full of fear.

A crash is when the market falls by more than 10%. History shows crashes tend to result in stock markets falling by as much as 20%, or more.

As you can imagine, for those people relying on the value of their stock investments to fund retirement, this can be a very distressing time.

So the big if we now face is whether this correction is going to become a crash.

Despite what you might hear, nobody actually knows right now what is going to happen. We just have to wait and see how things pan out over coming weeks.

So What Now Then

When it comes to investing, you all know that I am a big proponent of consistent action over the long term to secure your financial future.

This brings me back to my lesson from the blog post I mentioned earlier.

The thing about not being in the stock market is the very real risk that you will miss out on the best days, and your portfolio performance will suffer as a result.

This is why a consistent approach to the market is the key.

consistencyConsistent, regular investing is what gets results. Trying to be the next financial guru that picked the top or the bottom, and only investing when YOU think is the right time is doomed to fail.

Neither you nor I know what is going to happen tomorrow. Far better that we remove that stress from our life and instead focus on the long term goal.

Now having said that, if you are approaching retirement and most of your life savings are tied up in the stock market, then you might want to take some protection. Your focus will be on preserving your capital value to provide the income you need in retirement.

You don’t have the same time frame as someone just starting out or someone who is twenty years away from retiring.

For everyone else, the lesson I learned that changed my opinion about falling stock markets, was that I needed to be in the market all the time. A consistent approach of adding to my portfolio over a long period of time was far less stressful…

…and a lot more profitable than trying to pick when to be in the markets, or when to sell. The panic selling in times like these is what actually fuels the correction or the crash.

While we don’t yet know if we are in a correction or a crash. The key to your long term financial future is a plan. That plan is to be consistently adding to your portfolio.

Like I said, you will probably start hearing soon that stocks are at bargain prices. You might as well pick some up, right?

Let me know in the comments if falling stock markets have caused you any discomfort recently and what you are doing about it.

 

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