4 Good Moves in a Selloff

Was August just a prelude? Wall Street’s recent roller coaster probably filled you with fear for your financial future. Now, though, is the time to stay focused on your long-term goals. 

A correction means an index closes 10% below its 52-week high. This recent correction was long overdue. The last one happened four years ago.

China’s sputtering economy primarily drove the August drop. The Standard & Poor’s 500 is down 6.5% since mid-August, although it has nosed up from its low.

Some predict a 20% bear market selloff soon.  Fall specializes in market wipeouts (1929, 1987 and 2008). Very scary, but most successful investors separate emotion from investing.  “The investor's chief problem – and even his worst enemy – is likely to be himself,” legendary investor Benjamin Graham reminds us.

Here are four ways you can better control how you react in the face of any difficult market: 

Don’t panic. Since 1900, the S&P 500 saw 35 declines of 10% or more. In the wake of those corrections, the index fully recovered its value after an average of about 10 months. Even the sudden drops in the past few weeks are well within the long-term norm. The more you fixate on the financial news, the more volatile and risky Wall Street appears.

Access your situation. Are you honestly prepared to withstand further decline? Are you well-diversified and prepared for a potentially bumpy road – or do you need cash near-term? Prepare yourself and your portfolio to keep from taking drastic action at the worst time.

Review expectations. We been in the midst of a seven-year bull market. Results like that are unsustainable and your expectations may have become unrealistic. A healthy correction can resync the market for further future gains – especially if you want to buy into the market yet held off because of the high (and ever-rising) prices of the long bull run. 

Look forward. Stocks might of course drop, dive, stay flat, or even bounce right back. Two signs of strength in the U.S. economy have been job creation and housing. Unemployment stands at 5.1%, almost half the level following the 2008 financial crisis. Housing prices are rebounding. These are lagging indicators that have likely contributed to the markets’ strength over the past few years.

Also, oil is down nearly 60% from last year's highs. A gallon of gas averages $2.30 nationwide now, down from about $3.37 a gallon a year ago. Lower energy costs typically result in higher consumer spending, an example of a potential leading indicator in the economy that might spell future growth. As recently as mid-summer, increases in many leading indicators exceeded analysts’ expectations. How future readings react to the selloff, if at all, is yet to be determined.

No matter what direction the market takes, diversification, patience and self-knowledge are your best weapons against unavoidable uncertainty. Ultimately, a selloff marks a buying opportunity that pays off when prices go back up. (adviceiq.com)