In the midst of the worst market sell off in four years, what should you do now?
Although a common impulse would be to sell to avoid further losses (and many investors will do just that), those investors looking to maximize long-term risk-adjusted returns to meet their goals and objectives would do well to be patient. Time and time again, when things looked bleak, those who kept their heads about them and focused on achieving their long-term goals with diversified portfolios have been rewarded for their patience – even when being patient seemed counter-intuitive.
We have been harping on the fact that the markets have been unusually complacent and were well overdue for a correction. Some areas were already in bear market territory even before the recent market selloff. Oil is down by over 33%, just since June 30th, and has pummeled the energy sector. Emerging markets are also approaching bear market territory. However, the major market indices have been buoyed by a narrow band of stocks favored in index funds and exchange-traded funds and have not seen a correction of 10% or more in 1,418 calendar days. As we have noted previously, 10% corrections are common even in upward moving markets.
The reasons for this selloff are attributed to a number of catalysts, most notably concern about an economic slowdown in China, the world’s second largest economy. However, the U.S. economy is significantly larger than the Chinese economy and its relative strength here cannot be discounted.
When the markets look scary like they have in recent days, it is important to keep in mind your long-term plan to help you achieve your long-term goals. This requires patience rather than focusing on the headlines. There may be opportunities that arise as well. We will be on the lookout for these opportunities and whether they are appropriate for you.