As the market plunged almost 10% this Monday morning, following similar plunges in China and Europe, it is easy to ask whether one should be invested in the market at all. After all a 10% drop is significant, and the media makes sure that we know that.
And it is not just the US stock market. We have heard rumblings since June now about economic malaise in China, including today's 8% drop in Chinese stocks. We have fretted about Grexit, the potential Greek exit from the Eurozone. We have seen gas going down at the pump, and we cannot even feel good about that!
So then, is it time now to get out of the market? Or if you have cash on the sidelines, is it time to get in?
It is worth pondering that from 1900 to 2010, ten percent corrections have happened on average 3 times a year. Twenty percent corrections have happened on average every three and a half years. In other words, market corrections happen “all the time”. Based on statistical evidence, the only thing that your CERTIFIED FINANCIAL PLANNER™ can tell you with regard to future market directions is that it will go down and it will go up!
I know, it's not very reassuring. Your advisor or financial planner has probably told you that you need to be invested for the long term. That requires us to be committed, and to be invested. (If we have needs that are not long term, say college tuition for the next term, that money should not be in the stock market).
When, then, should we get in or out? The fact is that no one, not even the smarty pants who run your mutual funds, are able to time the market with any reliability. That is one of the reasons why mutual funds are consistently invested; they don't get in and out of the market based on fluctuations.
In a recent study, Dalbar found that from January 1995 to December 2014, the average equity fund investor made on average 5.19% a year, while the equity markets went up on average 9.85% annually. One of the key contributing factor to this huge disparity is that individual investors have a tendency to get out when the market is low, and to get in after it has recovered.
Yet, it is natural to be scared. If you feel scared about the financial markets, today may be a good time to call your CERTIFIED FINANCIAL PLANNER™. If you manage your own money, today may be the time to set an appointment with one! Go to The Financial Planning Association’s website : to find a CERTIFIED FINANCIAL PLANNER™ in your area.
Financial Planning Association of Massachusetts member Chris Chen, CFP®, CDFA™ is the principal of Insight Financial Strategists, LLC a Registered Investment Advisor in Waltham, MA, specializing in retirement planning and divorce financial planning.
The information contained in this article is not tax or legal advice. If you feel that it may apply to you, consult with a qualified professional.
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