No one knows where exactly the stock market is headed, but a sound financial strategy is the best way to counter whatever turns the market takes.
If you have a heavy load of stocks in your retirement portfolio, the past several days and weeks have probably brought you some agita. Economic unrest in China and other factors has caused a dip from a stout performance around 17,000 to an uneasy hovering in the 15,000 range. Will it go lower? Should you sell? Is a bounce-back imminent?
No one knows the answers. What we do know is that the economy is cyclical. Investing for the long-term means riding out highs and lows, aiming for sustained growth over the long-term. Unless your retirement is imminent, you’re probably better off sticking to your strategy, making sure you are diversified across industries (healthcare, real estate, technology, etc.) and types of investments (growth and blue-chip stocks, bonds, and many others).
It has been established over many years that the stock market follows a typical four-step cycle:
Accumulation phase: The market has bottomed out, and early adopters and aggressive investors are looking to buy low, figuring that the worst is over. General market sentiment is still bearish, but some see signs of life and begin to buy.
Mark-up phase: The market has been stable for a while, and is beginning to creep up. More investors begin to buy, cautiously at first, until the market begins to see some steady growth. Most people are bullish, although the early adopters may already be selling to maximize their value.
Distribution phase: Sellers begin to dominate, and the market starts to reverse direction. There may be some significant ups and downs in this phase, as uncertainty reigns.
Mark-down phase: The market nears its bottom, and even those holding out hope for a swift recovery begin to sell, believing they are cutting their losses. Next up in the cycle is a return to the accumulation phase, and the early adopters are already buying again.
Now that you know the (very generalized) pattern of market cycles, which phase are we in, and what should we do? I don’t know, and chances are very good that you don’t know, either. The simple truth is that each of the four phases above has fluctuations that can easily be misread. And what we think is the absolute floor of the stock index may not even be close. These phases are somewhat easily identified after the fact, but never during. Predicting highs and lows is a fool’s game.
If you plan to retire within the next few weeks or even years, your needs may be different, and if you are investing for a shorter-term goal than retirement, you may want to take a closer look at how close you are to meeting those goals, what you stand to lose if you sell now, and whether the current uncertainty is the sign of a coming distribution phase. If you are a decade or more away from retirement and are adequately diversified, you may consider doing nothing at all.
During the swift and devastating stock market crash of 2008, the Dow Jones Industrial Average (DJIA) dropped from a 2007 high around 14,000 to a dangerous low of just under 6,600. That crushed a lot of portfolios, and it hurt a lot of people who were planning to retire and looking at their portfolios through the rose-colored glasses of 2007. But if you weren’t planning to retire between 2008 and today, and you simply held on to your stocks, the current DJIA—around 15,500, even with the recent beatings, is higher than the 2007 peak.
The advice here is not to hang out to your stocks at all costs, counting on a swift recovery. Only you, hopefully alongside a trained financial advisor, can make that decision. The advice here is that if you have a sound investment strategy based on good economic principles, you should continue to act in accordance with that strategy, making sure you make adjustments to it as your goals change.
Trying to time the market and acting out of panic are two of the most common long-term investment mistakes. Set a good, safe course. Ride out the occasional bumps. Your destination is still out there, awaiting your arrival.