Editor's pick: Originally published Jan. 8.
The massive sell-off in the stock market, amid fears of a global slowdown in China along with record low oil prices, is a sign of short-term market volatility. Investors should avoid selling in a panic.
Though retirement portfolios received immense losses this week amid trepidation concerning geopolitical events, this does not spell trouble ahead for long-term investors as volatility in the market is not a new occurrence.
“This volatility is consistent with movements that we observed in 2015 and expect for 2016,” said Matt Pierce, a portfolio manager with Covestor, the online investing marketplace, and president of Island Light Capital, a registered investment advisor in Dover, Mass. “This short-term market volatility does not change our view that U.S. equity markets will finish 2016 with mid to high single digit returns.”
The qualms about China’s lack of economic growth precipitated a 4% sell-off in U.S. equity and global markets this week while oil prices dropped to 12-year lows and Treasury yields declined as “market participants move to lower risk assets,” he said.
“Last year’s events, including the outcome of Greece and Europe, China, the Federal Reserve, oil prices and economic data were just the tremors,” said Matthew Tuttle, the portfolio manager of Tuttle Tactical Management U.S. Core ETF (TUTT). “This is the quake.”
The perception of a crash in China’s market is driven by the country’s authorities readjusting the yuan and closing their market on a large selling day, said Yale Bock, a portfolio manager with Covestor and president of Y H & C Investments, a registered investment advisor in Las Vegas.
Avoid Panic Selling and Following the Herd
Instead of being alarmed by the decline in market returns, investors should take advantage of the volatility to rebalance back to their long-term asset allocation targets by selling assets which have increased in value while buying quality assets that have declined, Pierce said.
The declines in the market present a “great buying opportunity” since the beginning of the year gives investors a new “window” to contribute to their IRA in 2016, said Greg McBride, chief financial analyst for Bankrate, the North Palm Beach, Fla.-based financial content company.
“Now is the time to take advantage of the market pullback and resist the urge for a knee jerk reaction,” he said. “Anytime you see short-term moves in the market, people get riled up. The typical investor is not equipped to play a stock jockey and move in and out of stock positions.”
While daily volatility was substantial in 2015, most of the major benchmark indexes wound up closing near where they started in the year, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa. In 2015, three of the largest 20-point losses in the S&P 500 occurred since 1950. The past year also experienced large intraday swings such as August 24, 2015 when the Dow Jones index plunged over 1,000 points on the open, came back and then closed down nearly 600 points, he said.
“If you need the funds in the near term, then you shouldn’t be in stocks in the first place,” he said. “As difficult as it is, the best course of action for the long-term investor is to ‘stay the course’ and continue to add to investment positions through dollar cost averaging.”
Selling in a panic leads many investors to get back into the market at higher levels, which occurred to many individuals in the aftermath of the financial crisis of 2008, Johnson said.
“When you sell in a panic you are doing the opposite of what Warren Buffett says: ‘Be fearful when others are greedy and greedy when others are fearful,’” he said.