NEW YORK (MainStreet) — Panic is reaching a fever pitch for investors watching the market plummet. But while the Dow plunged 531 points on Friday and amid speculation that we could see another 600-point drop today, there's no need to respond rashly. A bit of zen can actually prevent investors from making decisions that exacerbate an already difficult situation.
With the Dow and S&P 500 reaching all-time highs in recent months, investors had to expect this, said Matthew Tuttle, CEO of Tuttle Tactical Management, based in Stamford, Conn.
“Investors who are prepared will be fine, but those who have come to believe ‘this time is different’ will get hurt like they always do,” he said.
“This bull market will die slowly, but all bull markets eventually die.”
These ups and downs are just part of being in the markets.
Avoid Making Predictions
Instead of trying to calculate when the pullback will occur or stop, investors should think long-term.
“The market timers’ hall of fame will always be empty," Tuttle said.
Since bull markets cannot last forever, one option is to allocate your retirement funds to a tactical money manager or tactical ETF, Tuttle said. Even if you get back to even and “earn” all of your losses from a previous dip in the market, investors should not necessarily be complacent with large losses in their retirement funds.
Buy and hold aficionados will argue that the strategy works, because even though the market falls, it eventually comes back. Of course, that's not always the case, and it depends on your outlook in and timeline for retirement.
As the Federal Reserve reconsiders raising interest rates this fall, weak employment figures, stagnant wage growth and negative geopolitical issues could be indicators the economy is bottoming out.
“If the Fed has exhausted their playbook and we are still headed towards a recession then we have a problem,” Tuttle said. “If we know the Fed has our back, but we also don't believe they have any options left, then one day we have a decline that doesn't rally back.”
The continued volatility in the stock market could is signaling an end to the bull market. Some of those warning signs include several consecutive years of strong performance, extreme levels of overvaluation and investor euphoria, said Joe Jennings, senior vice president of PNC Wealth Management in Baltimore.
The bursting of the technology stock bubble in early 2000 was a classic example of the end of a bull run. The S&P 500 was trading in excess of 30 times earnings results, he said. The overvaluation occurred despite the fact that many of the best performing technology stocks did not produce any earnings, but investors simply ignored the indications that something was amiss.
“There was a belief among most investors that the glory days of the bull market could last indefinitely,” Jennings said.
End of Market Cycles Difficult to Determine
Attempting to time the end of a bull market or other turning points which occur in market cycles is not only difficult, but it can be a mistake because “periods of over or undervaluation can persist longer than many investors expect and market peaks or troughs only become evident with the perspective of hindsight,” he said.
When a bear market begins its cycle, investors need to rely on their long-term goals instead of their emotions when they decide how to rebalance their retirement portfolio. Pullbacks in the market should be viewed as opportunities to purchase securities at lower prices.
“For investors who are in it for the long haul, time in the market is much more important than timing the market,” Jennings said.
A minor short-term pullback occurring in the market is definitely a plausible option and could be warranted, said Edison Byzyka, vice president of investments for Hefty Wealth Partners in Auburn, Ind.
“Whether it's the end of the bull market, however, is something that can be extensively debated,” he said.
Reallocation of Assets
For investors who are more risk averse or believe that the bull market is ending, allocating their assets toward more defensive sectors such as utilities and health care, could be good approach, Byzyka said.
Despite the fear of rising interest rates, having exposure to traditional fixed income as well as Treasuries with a five-year maturity could also be another option, he said.
“The most important thing to keep in mind in times of potential volatility is that trying to time the market, either on the upside or downside, is a sure way to derail any long term investment plan,” Byzyka said.
Gen X investors as well as Millennials should not fear a decline in the market and instead embrace the volatility by looking for discounts in equities since they have the “luxury of investing in the market for many years to come, which means more upside is very possible,” he said.
All Bull Markets End
Since all bull markets end eventually, being mentally prepared for its eventuality is the best course since they tend to stop in a “period of heightened euphoria,” said Bijan Golkar, CEO of FPC Investment Advisory in Petaluma, Calif.
“You should always be in a portfolio you are comfortable with so you can ride out the storm of a bear market,” he said. “Gen X and Y have a long runway ahead of them so it is important to learn this lesson early. You would not want to be the one who sits in cash for 20 years.”