Don't Know What To Do About Recent Market Turbulence? Read This.

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There's never been a better time to be in the stock market -- if you have a taste for chaos. China's hamfisted, bungling efforts to prop up its own plunging markets have created ripples of volatility across the globe. U.S. investors got a nasty surprise in late August. The S&P 500 dropped more than 11 points in roughly a week. Alarms were sounded. Bear market Cassandras smirked with knowing pleasure. The financial media went into hyperbolic overdrive.

The end was near.

And then, like it so often does, the market had the last world. Stocks shot up more than six-percent in two days. Bargain hunters jumped in. Crisis deferred.

For now, anyway. 

So, after all that hue and cry, what's really changed? Here's where we stand.

  • China is still a mess. The Chinese government has belatedly decided that its full-bore, hammer-not-a-scalpel intervention is unwise. Chinese officials have promised to back off. This will please global investors. Yet it might not prove politically popular in the provinces. China encouraged millions of rural, first-time market entrants to place huge bets in the domestic stock market. Recent losses have roiled the nation, and proved politically problematic. Despite China's promises to curb market intervention, don't expect the words "laissez faire" to ever be associated with this government's policy.
  • China's slowing growth has crushed the commodities market. The insatiable need for iron, oil and steel to develop fast-growing Chinese cities has ebbed. This isn't a short-term issue.
  • Know your history: Since WWII, the market has dropped by five-percent (or more) 11 times in August. Eighty percent of the time it has continued to drop in September. The average drop? Four percent.
  • Even during last week's turbulence, some stocks -- including Ford and Amazon -- did well.
  • Defensive sectors, as expected. also performed relatively well.
  • The Federal Reserve remains cloaked in uncertainty. All year long the tea leaves have pointed toward a fall 2015 rate hike. Recent developments in China and the U.S. may have changed those plans. Some observers now feel no rate hike may come this year.
  • If a rate hike does come, the recent turbulence in August could be a minor flare up by comparison. After years of rock bottom interest rates, nobody can say with certainty how the market will respond.

Priority Action Plan

While conditions seem to be changing very quickly (and dramatically in some cases) , it important to restrain the urge to overreact.  Some ideas to consider:

  • If you're a believer in historical trends, note the 80-percent figure listed above. A down September is no guarantee, but this certainly doesn't seem like a good time for a buying spree. A drop of the magnitude we've just experienced tends to do lingering structural damage to the market -- despite short-term rallies.
  • If you needed more evidence timing the market is a bad idea, it just arrived. Don't get stuck bailing out when prices are down and buying when they rally. Instead, rebalance your portfolio with defensive stocks: utilities, telecoms, consumer staples etc. 
  • Looking for a defensive play with a nice dividend yield? Buy utilities. 
  • Avoid sectors and companies directly influenced by China. Firms that generate most of their business from U.S. consumer discretionary spending.
  • If the bear market comes, don't panic. Like death and taxes, it's an inevitability. Resist the emotional urge to sell. Let reason be your guide -- and watch out for bargain buying opportunities.
  • Look at investing in decade-long increments. Over the course of 10 years, the market will have its ups and downs -- yet you're still almost guaranteed to come out ahead if you take the long view.

Our modern, 24-hour news cycle doesn't lend itself to sober analysis and rational behavior. Yet the secret to riding out market turbulence is simple: Don't deviate from the basic, proven principles that create wealth year after year, in good times and bad.

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