It's no secret that we have seen global stock markets suffer serious declines over the past few weeks. The big questions are: should we be concerned about this yet? and if so, what should we do?
The answer to the first question is no. Although we aren't happy about the recent declines, we are not overly concerned yet either. In fact, this is actually normal behavior. After long periods of market gains, like we saw for 2013 and the first 8 months of this year, what often follows is some period of market declines. As Brett Arends puts it, "Wall Street has been on a tear since March of 2009, the S&P 500 nearly tripling in one of the strongest bull markets on record". So it would be no surprise is this is just a normal market correction. This is just how things work, and our strategy is to ride out market fluctuations.
One tactic we employ to get us through these down periods is to ensure that every client portfolio always holds six or more years of expected portfolio withdrawals in Cash and Bonds. That way, clients living off their portfolios have lots of time to ride out the waves and can rest assured that the inevitable market swings have no short term effect on their current ability to spend assets.
The answer to the second question is that there is nothing we recommend doing in reaction to the current market decline. Being reactive is bad way to invest and usually results in selling at the wrong time, when prices are low. Instead, our goal is to construct client portfolios that will generate positive returns over the long run, despite the inevitable market swings.
Below is a video produced by Dimensional Fund Advisors. The content beginning at the 2 minute mark is particularly relevant to the current market environment.
As always, we are happy to discuss this or any issue in greater detail if you still feel nervous and uncomfortable about the stock market. ~FSB