This week we saw an 800 point drop in the market. Initially when the market drops, there’s an explanation.
The first couple of days of a market drop people usually shrug it off, but once you hit day three, people start to worry. And when we go past day five? Politicians begin finding someone to blame and people begin to seriously worry.
The market has been up since 2009. Minor dips have happened since then, but the last few years we’ve hardly seen any significant dips. A correction will come. It could be in five years, or it could be in five days. No one knows. Are you ready for the correction?
Consider this week a huge gift to test exactly where you stand! Here’s what you should be looking for…
They say: Why did the market drop? Who can we blame?
Two explanations came forward:
President Trump claiming it’s the fed’s fault. The federal reserve is raising interest rates because the economy is so strong. They’re trying to keep interest rates up so the economy doesn’t overheat.
It’s the risk of a trade war. It happened because of the trade difficulties with china, and it’s president Trump’s fault!
If you go back one month you’ll see that neither of these issues are new.
People are looking for someone or something to blame. The truth is that the market is like a three year old: it’s unpredictable. The market is driven by millions of factors, not one overriding factor.
Psychologists call it the narrative fallacy. It’s our human desire to want order.
We desire to be able to make sense of something, but some things don’t follow a set narrative. The market doesn’t have a cause/effect narrative.
We’re Asking: How did YOU respond to this week’s drop?
Too many people have no idea the level of risk they’re taking.
Look at your portfolio to determine how big of an impact this had. Look at how much the S&P dropped and compare that to how your portfolio dropped. This gives you a feel for how your portfolio does when the market drops. If your 401K is dropping as much as the market is dropping overall, that means you have a pretty heavy stock allocation.
How many of you all have no idea how much risk you’re taking?
<Quietly raises hand and looks around>
It’s okay because this week can open your eyes to what you can change!
Here are two factors to help you determine the level of risk right for you:
How do you feel about risk?
How does your plan feel about risk?
A Deeper Look For Those Preparing For Retirement
If you’re close to retirement it is critical you check your investments. If you’re the majority of people today, and plan on having to draw from your investments in order to have income, then you don’t have any business getting super aggressive this close to retirement. You need to slow your speedometer down.
If you have to take from investments, and you’re within 5 years of retirement, you have no business being invested aggressively. Anywhere above 65-70% in equities is too high. I don’t care if you personally feel fine with risk, I care about what happens to your plan if the market drops.
The danger is not only that we’ve been sitting on a market that’s up, but also that we’ve been sitting on interest rates that are going down.
People are putting more and more money into stocks to see some kind of return since interest rates are so low, and this is very dangerous. If you lose 20-30% it could wreck your plan. If you’re close to retirement, stop everything, and make sure you’ve adjusted your risk.
A Deeper Look For Young Professionals
I see a lot of younger people going super conservative when the market drops. How you feel about risk matters a lot more for young people. Their plan can handle risk, but it’s the fear of the risk that keeps them pulling out. Your plan will benefit from staying in!
In 2008 the market dropped 40%. If you were 40 in 2007, where are you sitting now? If you stayed in and kept investing you should have seen well over 300% growth. That drop was the best thing that’s ever to happen to your portfolio! You’re on track for retirement because of it.
Your plan can handle the risk but can you? Be moderate in your risk. You don’t need to be the most aggressive, you just need to stick with it.
The problem for young adults is that many of you weren’t investing 10 years ago. You’ve never experienced a drop, so how are you supposed to know how much risk you can handle? It’s not possible.
Younger people with more than 10 years to work until you retire, how did you respond this week? That is the test. If you felt a strong impulse to move your money out, maybe you need to be more conservative. If you didn’t even notice the drop, you better be aggressive!
The Takeaway For Everyone From This Week’s Market Drop
Make sure you adjust your risk. If you’re in retirement, adjust it to make sure your plan is going to be ok when the market drops. If you’re younger, make sure you’re taking full advantage of the market without being so aggressive that you’re going to pull out.
Don’t let the market drop have power over you.
Leverage this week as the gift it is and be prepared by understanding where you stand! If you want help and advice, just ask.