It hasn’t been a good week for the stock market. Recent declines may be causing some panic for employees concerned about their 401K investments, but this most recent correction, precipitated by China’s depressed economy, is a temporary setback.
“China is the second biggest economy in the world and it has been the growth engine at 6 to 8 percent. If they slow down, that is like one of our main cylinders going bust. Their market crashed and sent ours into a correction,” says certified financial planner, Wes Moss.
A slowdown in China, means a drop in commodity prices which can also have a global financial impact, but while this is certainly an international growth scare, it is not the same as the systemic collapse of the U.S. banking system that happened in 2007- 2008.
While we’ve all been hearing about what’s going down, but the truth is, some things, like bonds, are going up.
The best thing you can do right now is nothing, unless of course you are NOT doing the following:
Diversify. A 401k is not the stock market…hopefully. Anyone with a balanced portfolio will not have 100% of their money invested stocks. That diversification is your protection. If, for example, you have a 40% stock and 60% bond portfolio, even this week as the stock market has taken a beating, you’re only down 1.9%, says Moss. Bruised, but not out of the game.
Remember that corrections are temporary. This is surely a bad week, which means even balanced portfolios will be down, but stocks have never stayed down forever. This is historical fact. There have been a total 14 corrections of 10-20% since 1965 and another 11 corrections of more than 20%. On average it took the 10 to 20% corrections about four months to recover and 24 months for the corrections of more than 20% to bounce back. On average, the stock market corrects 5% every 10 weeks, 10% every 33 weeks, and 20% (considered a bear market) every two and a half years, based on historical data from 1928 to the present, says Moss.
Believe that investing is not a short-term activity. You will never make ANY money if you just sit on your cash. If you are sticking to a solid investment strategy (see below,) your money will not run out. This is true even if you are planning to retire in five years or if you are currently retired. “If you are five years until retirement, you will still be invested for 30 more years,” says Moss. Of course, if you are 60 and about to retire, you should not be 90% invested in stocks to begin with (see above.) For anyone who is already retired, this correction may be painful, but you should be able to handle a drop of 30 percent, Moss says.
Know that you have a plan. Everyone needs an investment strategy that works over time. If you don’t have one or you don’t understand the one you have, spend some time during this latest correction getting to know your finances. Being confident in your investment strategy will help you to stay calm even when the stock market isn’t.