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Stock Market Sell-off

Nobody likes it! This market sell-off is ugly. It’s not fun. It’s scary. But investors should take a deep breath and relax.

We’ve been through this before. It’s not the end of the world. It may not even be the end of the bull market that’s been going on for more than five-and-a-half years.

2008 was ten times scarier than this. What’s going on now is not even close! In the fall of 2008, stocks were already well below their all-time highs. The financial market was collapsing. Lehman Brothers went under. Washington Mutual failed. AIG almost didn’t survive. The credit market stopped working. (CNNMoney. Paul R. La Monica. October 15, 2014)

After the worst stock market drop of the year, plenty of people wonder if it’s time to sell?  The S&P 500 is up nearly 200% since it bottomed out in early 2009. There hasn’t been a correction since 2011, let alone a true “bear market” where things really drop (defined as a 20% decline). This recent volatility makes investors nervous and desirous of running from stocks and hiding in safe investments.

At Hoover Financial Advisors, we don’t believe in a market timing approach.  Rather, we structure a client’s portfolio based on their personal financial situation, investment goals and objectives, risk levels and income needs. Therefore, when there are market fluctuations, our asset allocation approach allows investors the opportunity to rebalance their portfolio, selling some securities high while buying other securities low.

We suggest investors consider the following points:

1) Put the recent market dip in perspective. The market is down, but still substantially up from its bottom in 2009.  “This is not earth shattering,” says Jurrien Timmer, director of Global Macro for Fidelity. “Volatility happens. A couple of percent is not a big deal. The market will correct by 10% almost any time. Over the course of history, it shows up as really nothing more than noise.”

2) Never sell in a panic. Selling when you’re anxious often means you sell at the low point and end up buying back in at a higher one — the exact opposite of what you hope to do.

“The worst time to decide to get out of the stock market is when it’s falling or right after a big drop,” says Kate Warne, an investment strategist at Edward Jones. “If you look at the days with the best market performance, a lot of them follow days with the worst market performance.”

3) Let history be your guide: Many of the biggest stock market upswings happen within days of a downturn. You could be off celebrating that you exited the market perfectly only to look like a fool for not catching the surge.

Consider this: Fidelity looked at the returns of the S&P 500 from 1980 through June 30, 2014. They found that an investor who missed only the best five days in the market would end up with a portfolio worth about 35% less than the one that had been fully invested the whole time.

JP Morgan provides the following perspective: 

1) A 10% correction is common

Chart 1

This chart shows intra-year stock market declines (pink dot and number), as well as the market’s return for the full year (gray bar). What is clear is that the market is capable of recovering from intra-year drops and finishing the year in positive territory, which should encourage investors to stay the course when markets get choppy.

2) The economy is poised for continued growth

Chart 2

Economic growth over the last 50 years has averaged 3.0%. In the second quarter, the economy grew at 4.6% year-over-year, compared to first quarter’s -2.1% growth. We will likely see a pickup in economic growth from this 2.2% to something closer to the average 3%.

Chart 3

Valuations look fair in absolute terms and look attractive relative to inflation and interest rates.

Summary:

We are here for you. All of the information that we have provided is important to remember but the most important piece of information we want you to understand is that we are here to help. We are happy to provide advice during these volatile moves in the market. If you have any questions regarding the markets, the economy and/or your portfolio please call our team of investment professionals (610-651-2777).

As always, Hoover Financial Advisors wants to be your source of information on all things investment and financial planning. Our goal is to help you sleep better at night and feel comfortable that we are taking care of you. Thank you for your support and let us know if there is anything we can do for you or anyone that you know who would benefit from our services.