If you are like many investors in the past week, you may be wondering how the recent toll on the market affects you and your financial goals. The latest decline in the stock market last week was concerning at the least for many investors, and understandably so, as it was the worst point drop for stocks since October of 2008. As the Dow decreased 10% in the last week, many recalled 2008’s financial crisis and were unsettled due the latest drop in the market. Though this is worrisome for some, one needs to keep in mind that the market has been fairly calm recently and this was nothing like the crash of 2008. When we take a look at the past 25 years, annual returns are positive in 27 of 35 years, despite intra-year drops of 14.2%. In fact, this year has been one of the least volatile years recently, as the market is up 2.2% YTD, and has not had a market correction in 1,418 days. In reality, intra-year declines of 5% or worse are not uncommon. It has been 20 years in fact since we have experienced a year without at least a 5% decline.
Realistically, the markets cannot go up constantly, as corrections need to take place as many financial speculators refer to them as. The Dow, S&P 500, and NASDAQ are all in ‘correction mode’ at the moment as they have dropped 10% from a recent peak. This is absolutely natural and America was overdue at the least for a so called ‘correction’. Taking a look at history, since 1900 (115 years ago) there have been 35 corrections in the S&P500. Studying those 35 corrections, the index had fully recovered its value after an average of about 10 months, as noted by Azzad Asset Management. Over the past seven years, we have been in a Bull Market, and the S&P 500 has gained 220% over the last six years. Though investors have done well in the recent years, it is important to remember that a seven year Bull Market may be unrealistic long term.
To take advantage of the market volatility, Fixed Indexed Annuities can protect your principal while still only participating with the upside of the market with 120% participation in a market index with no caps, and locked in gains. This is possible due to the product resetting annually based on the change in value of the index. FIA’s shine in times like these due to these products not participating directly in stock or equity investments. FIA’s are designed for retirement saving, and are long-term vehicles designed to help one save whether the markets take a downturn, or correction, or whether the markets are thriving.
As stock prices are reduced, some take this as a buying opportunity. Being opportunistic at times like this is smart, as buying low and selling high has always been the rule of thumb. The data speaks for itself when it shows that individual investors historically underperform markets by about 1.5% yearly due to poor timing of the market due to selling at times of panic or uneasiness in the event of a market downturn.
As no one knows the short-term future of the stock market, having a strategic, diverse, and comprehensive portfolio that are appropriate to client’s financial position will alleviate the stress and worries as a financial plan is meant to be a long term strategy that can hold its own when the markets fall. If you are using the stock market for long term advantages, you have time to recover from such downturns of the market if you choose to ride out the storm rather than sell when the markets are low.