Updated: Apr 4, 2020
With today's large decline in the U.S. stock market, I wanted to share some thoughts.
No news is good news.
The first vital thing to understand is that there was no specific news that caused the decline, such as poor economic data. Instead, this seems to be at least partially the result of "high-frequency trading" which is executed by computers that are programmed to sell when others are selling.
This isn't out of the norm.
We've all been a little spoiled by relatively calm stock markets in recent years. However, 10% declines have historically occurred about once every year. The Dow Jones has also risen approximately 40% since the election. It's simply impossible for that to continue forever and a correction is a healthy part of a functioning market. They also present opportunities to "buy low" as we re-balance your portfolios going forward.
It may not be over.
By many metrics, the U.S. stock market is expensive and would need to decline further before it became more reasonably priced by historic measures. However, in my experience (and academia's), attempting to sell and then buy back into the market later simply doesn't work. This is why a long-term perspective is imperative to investing success.
Nobody likes to hear it in the heat of the moment, but a hasty, emotionally charged decision, whether to sell an investment or buy a car, is almost never a good one.
Focus on what you can control.
No one can predict the movement of the market from one day to the next.
What we can control, and the largest determinant of portfolio returns is the mixture of investments we use among equities, bonds, and alternatives, and what percentage of them are domestic versus international.
I always advocate for globally diversified portfolios that are tailored to an investors risk tolerance and time horizon. This method helps dampen events such as today's while maximizing long-term returns.